Introduction: Why Does Crypto Trading Sometimes Feel Like a Trick?
Imagine you want to buy your favorite candy for $1. You go to the store, but by the time you reach the counter, the price has jumped to $1.10. You still buy it, but now you’ve paid more than expected. That’s slippage in a nutshell—except in crypto, it can cost you a lot more than just 10 cents!
In this guide, we’ll explain slippage in the simplest way possible. By the end, you’ll know exactly what it is, why it happens, and most importantly, how to prevent losing money because of it.
What Is Slippage in Crypto?
Slippage happens when the price you expect to pay for a crypto trade changes by the time the trade is executed. It means you might end up paying more (or getting less) than what you originally planned.
Example of Slippage
Let’s say you want to buy 1 Ethereum (ETH) for $2,500. You place the order, but by the time it gets processed, the price jumps to $2,520. That extra $20 is slippage—you paid more than expected.
Slippage can work the other way too. If the price drops before the trade is completed, you may get ETH for less than expected. But in most cases, traders lose money due to negative slippage.
Why Does Slippage Happen in Crypto?
These price changes don’t happen randomly. Here are the main reasons behind them, explained simply:
1. Market Volatility (Prices Change Fast!)
Crypto prices move rapidly. Bitcoin, Ethereum, and other cryptocurrencies can rise or fall in seconds. If there’s a big price jump while your order is being processed, you may end up with slippage.
Example: Imagine Bitcoin is trading at $40,000, and a whale (a big investor) suddenly buys a large amount. The price could jump to $40,500 in seconds, affecting your trade price.
2. Low Liquidity (Not Enough Buyers or Sellers)
Liquidity means how easy it is to buy or sell an asset. If a cryptocurrency doesn’t have enough active buyers and sellers, the price can change drastically before your order is completed.
Example: Suppose you want to buy 10,000 tokens of a new altcoin at $1 each. But only 5,000 tokens are available at that price. The next available price is $1.10, so your remaining 5,000 tokens are bought at a higher price, causing slippage.
3. Order Type (Market Orders vs. Limit Orders)
A market order buys or sells immediately at the best available price. If the price changes before the order goes through, you experience slippage.
A limit order sets a specific price, and the trade only happens if the market reaches that price, avoiding slippage but with no guarantee the order will be filled.
Example: If you place a market order for 1 ETH at $2,500 but by the time it executes, the price rises to $2,520, you experience slippage. If you set a limit order at $2,500, the trade will only execute if ETH is available at that price.
How to Avoid Slippage in Crypto Trading
Now that you understand why slippage happens, let’s explore ways to reduce or prevent it.
1. Use Limit Orders Instead of Market Orders
A limit order allows you to set a maximum price (for buying) or a minimum price (for selling). This ensures you never pay more or receive less than your desired amount.
2. Trade During High Liquidity Hours
Try trading when more people are buying and selling. Active markets (usually during peak financial hours) have enough buyers and sellers to keep prices steady.
3. Avoid Trading Low-Liquidity Coins
Small, lesser-known cryptocurrencies often have high slippage due to low trading activity. Stick to well-known coins with good liquidity.
4. Set a Slippage Tolerance
Many exchanges allow you to set a slippage tolerance (e.g., 0.5%, 1%, or more). This means your order will only execute if the price stays within your tolerance level.
5. Use Stablecoins for Trading
Pairing your trades with stablecoins (like USDT, USDC, or BUSD) can help minimize slippage because they are less volatile compared to regular cryptocurrencies.
6. Monitor the Market Before Placing Large Orders
If you’re trading a large amount, check the order book and market depth first. Splitting large trades into smaller chunks can reduce slippage.
Final Thoughts: Trade Smart, Avoid Slippage!
Slippage can eat into your crypto profits if you’re not careful. However, by using limit orders, trading in high-liquidity markets, and setting a slippage tolerance, you can reduce your chances of losing money.
Key Takeaways:
- Slippage happens when the trade price changes before execution.
- It occurs due to market volatility, low liquidity, and order type.
- Use limit orders, trade during high liquidity, and avoid low-volume coins to minimize slippage.
Want to stay ahead in crypto trading? Bookmark this guide and keep these tips in mind before making your next trade!
Frequently Asked Questions (FAQs)
Q: What is a good slippage tolerance to set?
A: A safe slippage tolerance is between 0.1% and 1% for major coins and 1-5% for low-liquidity tokens.
Q: Does slippage happen in all crypto exchanges?
A: Yes, but it varies. Popular exchanges with high liquidity (like Binance, Coinbase, and Kraken) experience less slippage compared to smaller exchanges.
Q: Can slippage be positive?
A: Yes! Sometimes, the price may move in your favor, meaning you get a better deal than expected.
Q: How do DEXs handle slippage?
A: Decentralized exchanges (DEXs) like Uniswap allow users to set slippage tolerance to avoid extreme price changes.