Bid-Ask Spread: its essence and significance in crypto trading

Analyzing the order book, one can notice a discrepancy between the maximum purchase price (22 346 dollars) and the minimum selling price (22 347 dollars). This difference of one dollar is the Bid-Ask spread. In trading terminology, the Bid-Ask spread represents the gap between the highest asking price and the lowest selling price in the order book. In other words, it is the distance between the minimum at which the seller is willing to sell the asset and the maximum that the buyer is willing to pay for it.

On most cryptocurrency trading platforms, the Bid-Ask spread is determined by the balance of supply and demand in the order book, usually remaining quite narrow. However, during periods of market turbulence or increased uncertainty, the spread can widen due to decreased liquidity.

The trading volume directly affects the size of the spread: the higher it is, the narrower the spread, and vice versa. This is explained by the level of competition among market participants: a larger number of players contributes to a narrowing of spreads.

Although there are specialized resources for tracking average spreads across exchanges and trading pairs, you can calculate the spread yourself. To do this, simply subtract the maximum buying price from the minimum selling price. For example, if the highest buying price of Ethereum is $1570 and the lowest selling price is $1570.50, then the spread equals 50 cents.

The Impact of the Bid-Ask Spread on Crypto Trading

The Bid-Ask spread can have a significant impact on the results of your trading operations, especially in the long term. These small discrepancies between buying and selling prices reduce potential profit, as you buy assets at prices above ideal and sell them at prices below desired. Each transaction takes a small portion of your income, but over time these losses can accumulate into significant amounts. Let's consider a specific example.

Suppose you are trading a hypothetical coin "ABC" with a market value of $0.35 and a spread of $0.02. In this case, you buy ABC at the minimum selling price - $0.36. Currently, the best opportunity to sell ABC is $0.34 (maximum buying price). Thus, to reach the break-even point, the price must increase by a full two cents, which is equivalent to about 5% growth.

In active trading, the Bid-Ask spread can significantly impact your overall profit.