What is Slippage in Crypto? Learn How to Reduce Its Impact

Most of the crypto traders will be aware of the term ‘Slippage’. Slippage is the difference between the expected price of a trade to the actual price of a trade at which the trade is executed. Slippage might benefit you or otherwise lead to potential losses. Read this article to explore about slippage. 

Key takeaways

• Brief understanding of slippage
• Types of slippage in crypto trading
• Reasons for slippage
• Strategies to minimize slippage in crypto trading

What does slippage mean in crypto trading?

Slippage is an inevitable aspect of crypto trading. This could influence the outcome of the transaction. Everyone who has been involved with crypto trading might has encountered Slippage at least once. 

Slippage is defined as the difference between the price at which a trader anticipates the trade and the price at which a trade is executed. In short, this happens when there is a difference in the expected price of the cryptocurrency and the price at which the order is filled. 

Types of slippage 

There are two types of slippage: positive and negative, both having their own implications for traders. 

Positive slippage 

This slippage occurs when a trade executes at a better price than originally expected. 

For buy orders: The asset is purchased for a lower price than what was anticipated. This saves the trader money. 

For sell orders: The asset is sold at a higher price than expected. Trader earns a greater profit. 

Negative slippage

This is a more common one and occurs when the market price fluctuates negatively before a trader’s order is filled. This will result in a less profitable trade. 

For buy orders: The asset is purchased for a higher price than expected.

For sell orders: Receiving a lower price than what traders sold the asset for.

Reasons for slippage 

Several factors contribute to slippage and they are as follows: 

• If the liquidity pool lacks a considerable reserve of assets, even a small trade can cause fluctuation in the price. The possibility of slippage is high in low liquidity pools as the traders impact the available reserves and change the price curve. 
• The crypto market is highly volatile so the price fluctuates rapidly. As a consequence, the time taken to execute a trade on-chain might end up with a different price than expected. The price volatility is like a driving force for slippage. 
• As larger trades consume more liquidity from the pools, the price starts to upsurge and result in more slippage. 
• If the confirmation time taken to execute the transaction increases it will lead to slippage. This happens when the price moves due to other transactions being processed. 
• Even the structure of Automated Market Makers (AMM) itself contributes to the introduction of slippage. Trying out newer designs such as Uniswap V3 could optimise liquidity. This approach helps minimize the slippage within those ranges, however, slippage can still occur outside the range. 
• AMM process transaction speed also influences slippage. If it executes with less delay time, the chance for price fluctuation will be reduced and the opposite will happen if the delay time increases.

How to reduce slippage in crypto trading

As we mentioned earlier, slippage is an unavoidable part of crypto trading, but by implementing several strategies it is possible to mitigate its impact and protect the profits. Check out the strategies. 

1. Limit orders: Traders are given the provision to set the maximum price they are willing to pay for a buy order or the minimum price they will accept for a sell order. 
2. Choosing the most liquid markets: The major reason for slippage is low liquidity and high volatility. This condition can be overcome by trading during high liquidity and low volatility periods. 
3. Slippage tolerance: Some platforms will have a ‘slippage tolerance’ setting. This feature allows traders to control the maximum price difference they will accept. But be careful that you haven’t set it too low as it could result in unfilling the order. 
4. Market orders: This executes immediately at the current market price. The speed makes the market orders more prone to slippage, especially in volatile conditions. 
5. Trading smaller amounts: Diversifying the large orders into smaller ones can reduce the slippage and ensure better trade execution.

Final verdict 

Slippage is an inevitable vulnerability that affects many investors and results in bearing additional costs. The term might be familiar for the traders but might lack knowledge about the strategies to minimize it. If the traders have a strong understanding of several aspects of slippage can gain an edge in designing and deploying crypto strategies. This can potentially reduce the risk and also increase the profitability. 

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