When crypto prices slide: What is slippage in crypto?

Swapping cryptocurrencies may seem simple: check the latest price feeds, calculate the exchange rate, and complete the transaction. While the process appears straightforward, executing it can be more complex. Market inefficiencies often affect cryptocurrencies, leading to unpredictable price changes and making it difficult for exchanges to offer precise prices. Whether on centralized exchanges (CEXs) or decentralized exchanges (DEXs), discrepancies can and do occur. In trading circles, it's known as "slippage," and it frequently impacts those using a market order in a volatile market.

While it's hard to avoid slippage entirely, there are ways to minimize its impact. Understanding what slippage is in crypto trading and how it affects trade execution is the first step toward managing it effectively.

What is slippage in crypto?

Slippage refers to the difference between the quoted price and the final price when executing a cryptocurrency order. Because digital asset prices constantly fluctuate due to supply and demand, the value per coin often changes unexpectedly as a trade is completed. When prices shift before an order is fully processed, traders may end up paying more or less than anticipated, as the final price "slips" from the original quote.

Types of slippage in crypto trading

Slippage occurs in different ways, depending on market dynamics, but it generally falls into two main types: negative or positive slippage and liquidity or volatility slippage:

Negative slippage 

Negative slippage occurs when price volatility works against the trader. In this case, the cryptocurrency's price moves unfavorably during the trade, meaning the trader either pays more than expected or sells for less. For example, if a trader places a sell order for 1 Bitcoin (BTC) at $60,000 and it closes at $59,900, there’s a $100 profit loss.

Positive slippage

Positive slippage is the ideal scenario for traders. Here, the price of the cryptocurrency moves in the trader’s favor by the time the order is executed. In the reverse of the previous example, if the trader sells 1 BTC with a quoted price of $60,000 but the closing price is $60,100, they gain an additional $100 in profit.

Liquidity slippage

Liquidity slippage occurs due to low market activity. When there aren't enough buyers or sellers, matching counterparties and filling orders at consistent prices becomes difficult. This leads to gaps between the prices buyers and sellers are willing to accept, increasing the likelihood that the final price will differ from the quoted price.

Volatility slippage

Volatility slippage happens when rapid price changes make it hard to settle on a stable rate. Sharp price spikes or drops can result in unpredictable prices, as heightened market activity from buyers and sellers creates uncertainty during execution, especially in volatile markets where trading activity shifts quickly.

Note: Liquidity slippage and volatility slippage may overlap. For instance, low liquidity in an obscure altcoin combined with sudden demand can amplify price fluctuations, leading to both types of slippage.

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Slippage versus spread: Is there a difference? 

Price spread and slippage both involve price discrepancies, but they aren't the same. Unlike slippage, the crypto spread measures the current difference between the highest price buyers are willing to pay (the "bid") and the lowest price sellers are willing to accept (the "ask"). For example, if the bid price for Bitcoin on an exchange is $50,000 and the ask price is $50,050, the spread is $50. While this difference can contribute to trade slippage, the spread only reflects the latest market conditions. It doesn’t necessarily determine the final trade price.

How to calculate crypto slippage

With constant fluctuations in market price and liquidity, slippage can't be precisely calculated before it occurs. However, you can determine the impact of slippage on each crypto swap after the order is filled using this formula:

Slippage percent = ((Expected price - Completed price) / Expected price) * 100

For example, if you place a trade for one Solana (SOL) with a quoted price of $130 per SOL, but the final price is $125, the slippage percent is 3.8%, which is calculated as:

(($130 - $125) / $130) * 100

Strategies to mitigate slippage in crypto trading 

While slippage is common in the crypto space, there are practical ways to manage its impact and minimize its effect on trade outcomes. Those include:

• Slippage tolerance controls: Sometimes, crypto exchanges offer an advanced "slippage tolerance" feature where traders set their max percentage range before finalizing their trade. With this control in place, a trade won't close if volatility or liquidity takes the cryptocurrency's market price outside of a trader's preferred range. For instance, if a trader sets slippage tolerance at 1% for one Ethereum (ETH) at $2,500, the trade won't close if ETH's closing price rises or falls by 1% (or $25). 
• Market and limit orders: Slippage typically affects traders using market orders, which execute immediately at the current price. Limit orders, on the other hand, let traders set a specific price they're willing to pay or receive. While a limit order may not fill if the price doesn’t reach the desired level, it ensures trades occur at the predefined rate. Using a market order in a volatile market increases the risk of slippage due to sudden price changes.
• Place orders during peak trading hours: To minimize slippage, traders can place orders during periods of high trading activity, such as when the U.S. stock market is open. Increased activity narrows the spread between buyers and sellers, making it easier to execute trades more efficiently.
• Research market depth: A crypto exchange's market depth reveals the volume of buy and sell orders at various price levels. Understanding market depth, along with average trading volumes across exchanges, helps traders assess liquidity and gauge how easily trades can be executed. Shallow market depth increases the likelihood of slippage, especially for large trades.

Are certain cryptocurrencies more prone to slippage? 

Slippage impacts all cryptocurrencies, but it's less of a concern for top-ranked coins. Large crypto projects with high market caps, broad accessibility across exchanges, and strong trading volumes are less vulnerable to the sharp price swings or liquidity issues often seen with low-cap, speculative assets. Traders using market orders for these assets might still face some slippage, but it’s less pronounced compared to smaller, low-volume tokens.

Major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) and stablecoins such as USDT and USDC have a reputation for higher liquidity. This means more traders are available to handle large trades, resulting in tighter spreads. By focusing on highly liquid assets, traders reduce the likelihood of their orders being filled at unfavorable rates compared to smaller, lesser-known altcoins. 

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.