Have you ever spotted what you’d regard as a perfect opportunity to buy or sell a particular cryptocurrency at a specific price? Unfortunately, after entering and confirming the order, you discover that upon execution, the amount of crypto received is slightly different from what you expected. That difference is called “slippage.”
Slippage occurs in all financial markets due to volatility and varying levels of liquidity. However, it is more pronounced in fast-paced markets like cryptocurrencies. Slippage occurs due to various factors, such as market volatility, liquidity, and the size of your order. Even a fraction of a second can make a significant difference in the crypto world, where prices can soar or plummet in the blink of an eye.
As a trader, understanding slippage can help you make better trades and profits, as you can set a slippage tolerance to determine an acceptable deviation in the price you are willing to tolerate when executing a trade.
In this article, we will delve into the details of slippage tolerance and how this concept can help you trade better, ensuring you get the best possible value for your investments.
Understanding Slippage Tolerance in Crypto Trading
As mentioned earlier, slippage is influenced by various factors, including market volatility, liquidity, and order size.
Crypto markets can be extremely volatile, with prices swinging wildly up and down; hence, within seconds of your order and its execution, the price could change, leading to a variation in what you’d receive. Similarly, asset liquidity also affects slippage. A less liquid asset (one that isn’t easy to buy and sell) would be more difficult to trade; hence, there could be a difference in the amount received as of the time your transaction is executed. Also, trading large amounts of assets that significantly impact the market could cause prices to move before your trade is executed, which can result in slippage.
Of course, to reduce the impact of slippage to a bare minimum, some exchanges (particularly decentralized exchanges) allow users to set slippage tolerance in order to ensure that the price deviation isn’t too much. So by definition, we can say, slippage tolerance is the maximum price deviation a crypto trader can allow within the period of order and execution.
For example, if you place an order to buy 1 BTC at $25,000, but upon getting the asset in your wallet, you see 0.98BTC, it means you have lost 2% of your assets due to slippage, which, in this example, is about $500.
Now, let's talk about why slippage matters. Every crypto trader dreams of maximizing their profits, and slippage can put a dent in those dreams. When slippage occurs, it eats into your potential profits or increases your losses. Even if you don’t lose as much as $500, smaller losses can add up over time, especially if you're an active trader executing numerous trades.
Moreover, slippage can affect the execution of your trading strategies. If you rely on precise price levels to trigger your trades, slippage can throw your strategies off balance.
However, with the ability to set your own slippage tolerance, you can set the acceptable price deviation that you're willing to tolerate for each trade.
Typically, exchanges and market makers allow trades to go on without any slippages due to the volatile nature of cryptocurrency; hence, if they set a cap on it, the transaction may fail. For example, if you decide to buy 1 BTC at $25,000 and the price changes to $25,001, the transaction will fail if there is zero tolerance for slippage.
Hence, to ensure that traders do not get stopped from their trades for lack of slippage, centralized exchanges use a limit order system for users to set their preferred slippages. However, the issue with a limit order is that the transaction will fail if the trade doesn’t meet the exact target set; however, with an adjustable slippage tolerance, you will get the maximum possible crypto amount based on your tolerance without necessarily setting an exact figure.
Again, to put this in figures: if you want to buy BTC, which is currently higher than $25,000, and you sell it to get 25,000 USDT without losing much due to volatility, you can set a limit order to sell BTC at $24,950 such that the trade will be automatically executed the moment BTC goes below $25,000.
However, with an adjustable slippage tolerance, you can just set your slippage tolerance to something as little as 0.2%, such that if you place the sell order for 1 BTC at $25,000, the transaction will fail if the price difference exceeds 0.2% (a $50 difference). So, you expect to get a minimum of $24,950 for your order; however, you could even get as high as $25,050 for that order - no more, no less.
So, on the one hand, adjustable slippage tolerances may help you get closer to your desired entry or exit price, minimizing the deviation, but on the other hand, they could lead to missed opportunities if the market doesn't play nice and quickly reaches your desired price before your trade is executed. However, if you set too wide slippage tolerances so you don’t miss out on your trade, you invariably allow for more price deviation, which could eat into your potential profits or increase your losses.
The key is setting a balanced slippage tolerance where you feel comfortable and confident in your trading decisions.
Cwallet: Enabling Low Slippage Cross-Chain Swaps
Typically, slippage tolerance can only be set on decentralized exchanges, which can only be accessed by a non-custodial wallet. However, Cwallet is a one-of-a-kind crypto custodial wallet that allows users to edit their own slippage tolerances - you don’t see that every day.
Hence, with Cwallet, you can swap 800+ cryptocurrencies on over 50 blockchains FOR FREE with the added ability to edit your own slippage tolerances to ensure that you get the maximum value for your trades.
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