Picture this. You’ve kept your eyes on a cryptocurrency that you’ve wanted to buy into for some time. The opportunity comes as a 30% drop leaves the coin at a huge discount, so you plan to buy 10 coins in that currency. You open your wallet, double-check the price of the coin, and click to confirm your purchase of 10 coins… Yet somehow, the amount you now hold in your wallet is less than the original purchase price: you only own 9.4 coins??! What happened?
Slippage is something that can catch newer investors off-guard without them even realizing what happened.
It is called “slippage” because as you continue to buy an asset, the price slips higher which results in you getting a worse rate. Put simply, slippage is when the market price and transaction price do not sync up. This could be for two reasons:
- Crypto is very volatile and is constantly being traded at varying prices. This means when the executed buy / sell time confirmation occurs moments after the actual buy / sell was selected, the slight delay allows for the volatile market to move in that time frame causing the price to differentiate.
- Insufficient liquidity on the exchange or platform to fulfill the current order.
The latter of these issues is usually because the crypto asset is either new or lacking in popularity. This means that to either buy or sell, someone has to be willing to also buy / sell it for the same price. If there is no buyer or seller for the requested price, a trade either is confirmed at the next best option or will not go ahead. This is where the slippage settings come into play.
HOW TO MINIMISE SLIPPAGE RISK
The slippage settings are accessible before each trade you confirm on almost any exchange, platform, or wallet. Setting an amount you’re comfortable with trading at is the safest way to avoid getting wrecked. The key is to adapt the slippage based on what you’re trading and how you want to trade it.
If you set the slippage too high, you’ll run the risk of paying more for less or “frontrunning”, but if the slippage is too low, you may miss market opportunities. Understanding where the sweet spot is and the correlation between slippage usage and the fundamentals / price action of a cryptocurrency can make a world of difference with how successful your strategy is.