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Key Takeaways

  • Slippage is the difference between the expected price and the execution price of a trade caused by a number of factors.
  • There are two main variations of this issue: price slippage, which occurs due to rapid price changes, and liquidity slippage, which happens when there isn’t enough market liquidity to fill an order at the expected price.
  • Key factors causing crypto slippage include market volatility, large order sizes, low market liquidity, and transaction speed.
  • To minimize risk, traders can use limit orders, stop-loss orders, trading bots, and conduct thorough market research to make more informed trading decisions.

If you’re a crypto holder, you might find yourself trading on centralized and decentralized crypto exchanges frequently. In trading, timing is everything, but not all trades can be executed immediately at the desired price. Sometimes traders pay more or receive less than what they initially expected. This is known as slippage and it can significantly impact trading results. In this article, we’ll go over how this issue works, different types yoou might encounter and how to minimize it.

What Is Slippage?

Slippage is the difference between the anticipated price of a trade and the actual price at which a trade is executed. It’s a common problem in the traditional stock market and an even bigger one in crypto.

A couple of major factors can lead to slippage. These include the market’s volatility, the speed of the transaction and the order book’s depth. Slippage can result in a trader paying more while buying or receiving less when selling but it can happen in both directions when trading. This means that positive slippage also exists, a rare occurrence when a trader gets a better price than the expected one.

Types of Slippage

Depending on the reason that causes it, slippage can be categorized into two main types: 

Price slippage – The difference between the price when an order is placed and the price when it’s executed due to volatility.

Liquidity slippage – The price difference between placing an order and its execution caused by low liquidity.

Price Slippage

Price slippage occurs when there is a difference between the market price when an order is placed and when it is executed. This type of slippage is a natural part of volatile markets where prices can change rapidly within a short period. 

For example, you might place an order to buy Bitcoin at $60,000 but pay slightly more since the price has gone up to $60,500 by the time the order is executed. This variance can affect both buy and sell orders Since crypto is still quite volatile, price slippage is something to always keep in mind.

Liquidity Slippage

Liquidity slippage happens when there is not enough market liquidity to fill an order at the expected price. This typically occurs in less liquid markets or with large orders. 

For instance, let’s say you want to buy a large quantity of cryptocurrency on an order book exchange. With a limited number of sellers available to fulfill your order at the desired price, you would need to buy part of the order from sellers offering a higher price. This results in your order costing more. Liquidity slippage underscores the importance of understanding the depth of the market before placing large orders.

What Causes Crypto Slippage? Key Factors

Crypto slippage is influenced by several factors that are prevalent in both traditional finance and unique to the crypto ecosystem.

Market Volatility – Price movements happen in any market, but the notorious volatility of the crypto market magnifies the risk of slippage. Rapid price movements can cause significant slippage even in the short period between an order is placed to when it is executed. Events such as global news announcements, regulatory updates, or large trades can trigger substantial price changes within seconds, leading to slippage.

Order Size – The size of your order can significantly impact slippage. Large orders are more likely to experience this problem, especially in markets with low liquidity. If the order size exceeds the available volume at the desired price level, it will spill over into higher price levels for buys (or lower levels for sells).

Market Liquidity – Market liquidity represents how quickly an asset can be bought or sold without affecting its price. In highly liquid markets, there are ample buy and sell orders. Since orders can execute immediately, they are generally finalized at the expected price. Conversely, in illiquid markets, there are fewer available assets. Slippage can occur in the delay between making the trade and finding the liquidity needed.

Network Congestion – The efficiency of exchanges and blockchain networks also plays a role. During periods of high network activity, transaction processing times can increase, leading to delays. These delays can lead to trades being executed at less favorable prices. Network congestion can also lead to higher transaction fees, further complicating the slippage issue.

Example of Slippage in Crypto

Liquidity is often a problem for many of the smaller projects and this becomes most evident with meme tokens. One of the most recent notable cases of slippage in crypto was a large purchase of the popular meme token Dogwifhat (WIF). 

Back in January 2024, a trader decided to purchase $8.8 million worth of WIF  in three transactions through a decentralized exchange. However, After the order was executed, the trader was left with only $3 million in assets.

This massive loss was caused by the supply mechanism of the exchange platform. With the very large first purchase drastically reducing the liquidity of the asset on the exchange, there was a rapid spike in the token’s price. As a result, the following two orders executed at a much higher price than the buyer agreed to initially and far fewer tokens than expected.

The Dogwifhat story has been dismissed by some as a marketing stunt, but it nonetheless highlights how crypto market dynamics can amplify the risks of slippage.  

What Is a Slippage Attack?

A slippage attack is a type of exploit in decentralized finance where an attacker uses market mechanics to manipulate the price of an asset. This typically occurs on a decentralized exchange and it involves large trades or low liquidity.

For example, a malicious party can place a large order to inflate the price of a low-liquidity DEX token, offering to pay more than the current market value for the order. This will trigger the orders of other traders. In the meantime, the attacker can take advantage of the price impact and immediately sell their tokens, profiting from the price difference created by the original purchase order.

How To Calculate Slippage

To properly calculate slippage, we need to compare the expected price of a trade with the actual executed price. 

First, note the price at which you intend to trade (expected price). 

After the trade is completed, check the price at which it was actually executed (executed price). 

The difference between these two prices represents the slippage, which might be positive or negative depending on the price movement.

The formula for calculating slippage is:

Slippage= Executed Price – Expected Price/Expected Price *100

Let’s say you wanted to buy 1 ETH at a market price of $3000. You placed an order but due to volatility, it executed at $3100. Applying the formula gives us the end result of ~3% slippage.

Slippage Amount = 3100 – 3000 = 100

Percentage = (100/3000) x 100

Percentage =  0.03 x 100 = 3.3%

How To Minimize Slippage

Slippage is a problem that affects traders of all sizes. Fortunately, traders can control and limit their exposure to slippage by adopting several effective strategies:

Limit Orders – Using limit orders allows traders to set the maximum price they’re willing to pay for a buy order or the minimum price accepted for a sell order. Limit orders only execute at the specified price, unlike market orders, which execute immediately at the market price. This can help prevent significant slippage by ensuring trades only happen at the desired price levels.

Stop Losses – Stop-loss orders are designed to limit potential losses by automatically selling positions when the price reaches a certain level. While they’re primarily used to protect against downside risk of volatile assets, stop losses can also help manage slippage. This is done by ensuring that trades are executed before market conditions worsen significantly.

Trading Bots – Trading bots can automate the trading process and execute trades based on pre-set criteria. Bots can help traders reduce slippage by monitoring the market 24/7 and executing trades at optimal times when liquidity is higher and volatility is lower. In addition, bots can split a large order into smaller ones to reduce the impact on the market and minimize slippage.

Do Your Own Research – The best way to minimize your risks is by doing your own research (DYOR). In particular, you should define your slippage tolerance before you begin trading. This will allow you to make more informed decisions about when and how to place trades, and the tools you need.

The Bottom Line

Slippage is an unavoidable aspect of trading in both traditional and crypto markets. Understanding what causes it and implementing strategies to minimize will minimize your exposure to this risk. By using tools like limit orders, stop losses and trading bots, you can reduce your exposure to slippage and better protect your investments. And remember, always do your own research to stay informed.

FAQs

What Is Crypto Slippage?

Crypto slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It occurs due to rapid price changes, market liquidity, and the size of the order, leading to a higher or lower trade cost than initially anticipated.

How Can I Avoid Crypto Slippage?

To avoid crypto slippage, you can use limit orders instead of market orders, utilize stop-loss orders or employ trading bots to execute trades during optimal market conditions. Conduct thorough research to stay informed about market trends and conditions.

What Causes DeFi Slippage?

DeFi slippage is caused by factors such as low liquidity in decentralized exchanges, large order sizes, high market volatility, and network congestion that delays transaction execution. All of these lead to price discrepancies.

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