Slippage is the term used when the price at which an order is executed does not match the price at which the order was placed. Phenomenon feared by traders, let's find out what is slippage. Why does slippage occur and how to avoid slippage when trading cryptocurrencies? Slippage occurs when the market suddenly moves against you and, by the time your broker executes your order, the originally requested price is no longer available.
What is slippage?
Slippage is the difference between the expected price of a trade and the price at which the trade is executed. Such an effect occurs in the majority of cases when a large order is executed, but there is not enough volume at the chosen price in a market to maintain the current spread between supply and demand.
Cases of slippage can therefore occur at any time and in all markets, but they are particularly frequent in periods of high volatility, when market type orders are used.
For example, in the event that a whale buys in a single multi-million dollar transaction of a token on a platform with low liquidity, the order may not be executed at the desired price.
Example of a slippage
Another example, in the event of high volatility in a market, it is quite possible that a stop loss is not respected. The execution of the order may start downstream, which will cause a greater loss than what was calculated by setting the stop loss. This is especially common on platforms where the latency is quite high, like BitMEX.
Compared to stock markets or even Forex, cryptocurrencies are much more likely to be affected by slippage.
Indeed, the cryptocurrency market being much more volatile than the others, the effects of slippage are much more marked. Between the request to execute an order and its actual execution on the platform, a few seconds are enough for the price to rise or fall by a few percentages.
Combined with a platform where liquidity is relatively low and latency high, the consequences can be dire for unprepared investors.
Note, however, that the slippage effect can be both positive and negative, allowing you to get an asset at a better price than what you initially wanted.
How to protect yourself from slippage?
As we have seen, slippage most often appears on platforms with low liquidity on a given asset. Thus, cryptocurrency trading platforms with few users and low volumes are much more sensitive to slippage effects.
This also concerns cryptocurrencies whose volume is of the order of a few thousand dollars. Only one large order and the platform's order book cannot keep up.
So, to avoid slippage, I strongly suggest that you use a platform where the liquidity of its markets is relatively high. The best students in this industry are Binance, Huobi, Coinbase, and Kraken. You can check the list provided by CoinMarketCap.
''These platforms are not entirely exempt from slippage, but display a high resistance to this effect''
Whales also have the possibility of using OTC services (over-the-counter) in order to make large-scale purchases or sales, without risking any slippage on the market concerning their order.
Concrete case of slippage
Let's take a closer look at what slippage looks like straight from the price charts. As an example, I selected negative slippage. This took place on August 10 on the decentralized exchange Uniswap, for the ETH / USDC pair.
Surprisingly, a whale entered into a series of swaps totaling nearly $ 17.9 million, with a view to purchasing just over 40,000 ETH. Thus, the price climbed 12.5% at regular intervals in the space of a few minutes.
When placing orders, of Ethereum ETH's price was around $ 400, this trader's trades were valued at around $ 16 million. However, due to heavy slippage, the whale suffered a loss of nearly $ 2 million during its operation.
The orders, much too large for Uniswap at the time of the facts, were therefore victims of significant slippage. The liquidity being far too low to meet the trader's demand, he will have bought his Ethereum ETH well above the market price:
You now know all about slippage! Much more often negative than positive, it can be particularly destructive when placing large orders in markets with low liquidity.
Do not panic, however, if you do not commit large sums in your transactions, you should be immune to this effect. As long as you do not trade in tokens with a volume of a few thousand dollars.