What is Slippage in Crypto and Reasons Why It Occurs?
You must have seen errors like “The transaction cannot succeed due to error” while buying cryptocurrency. It symbolized the deficiency of ordered coins. But why do such errors appear? Slippage is the reason. What is slippage in crypto? People who are involved in the cryptocurrency trade would be curious to know about slippage. To know more about, what is slippage? And why does slippage occur? Stick to the end.
What is Slippage?
In terms of cryptocurrency trade, slippage is the difference between market and transaction price. You set a budget of $10 after viewing the price on an exchange, but a bill of $17 appeared when you saw the transaction receipt. What has happened? The increased price on transaction receipts is due to slippage.
There are two reasons for the occurrence of slippage: volatility and liquidity.
The world of cryptocurrency is very volatile. We don't know which crypto coin becomes famous overnight and its price increases from 0 to a million dollars. When you have plans for buying famous crypto then you need to deal with volatility. You log in to an application for checking the price of crypto and make your mind to invest. When you move towards placing an order, you will see an increased price.
To simplify the concept let's take an example. You want to buy Bitcoin. You log in to the application for checking the current price of one bitcoin. $10 is the present rate of each coin. When you refresh the page for placing an order, you will see an escalated price of $12. It means the slippage rate is 20 now.
Liquidity means when your order size increases the availability of crypto coins. Less common crypto coins are not available in less quantity with high prices. They are placed in ascending order on an exchange. Top sellers offer less rate, when you move down the list, the price increases. To meet the demand, you need to slip down to a high price seller. For example, we need to buy 10 XRP. There are three sellers on exchange offering prices of $1, $2, and $3 of each coin. Each seller has 5, 3, and 2 coins. You slip to each seller to fulfill the order for 10 XRP. Due to a shortage of coins, your total bill becomes $17 whereas the expected price was $10. Hence, in this case, the slip rate is 70 now.
Types of Slippage
Slippage is not always bad. There are two types of slippage:
1) Positive slippage
When you receive more than your expectation. It doesn't happen often.
2) Negative slippage
When you receive less price than your expectation. It happens often.
How to Control Slippage?
We can control slippage by proper manipulation. Applications offer the option of slippage control. Users have the authority to adjust slippage percentages. We can add a particular percentage on which we are happy to buy a coin. If the price of a coin increases that threshold our order fails automatically and we get error messages. Otherwise, our order is placed.
Cryptocurrency dealing is not easy. We need to get a proper understanding of the crypto working medium before planning to invest. Investors who don't know, what is slippage? Often face huge losses. Therefore, make sure that you know about every minority and every basic concept before investing in cryptocurrency.