Slippage in cryptocurrencies: how to minimize losses when trading
What is slippage in cryptocurrency?
Slippage in cryptocurrency occurs when the actual price at which an asset is bought or sold differs from the price specified in the order (the trader's request).
For example, a trader placed a limit (pending) order* to buy Bitcoin at a price of $78,000. However, after the exchange order was executed, the trader found that the purchase was made at $80,000 instead of the $78,000 specified in the order. This is exactly where slippage in cryptocurrency came into play.
* A limit, or pending, order is a trader's request to buy or sell an asset at a pre-set price or under more favorable conditions. Such an order is not executed immediately; it is executed only when the market price reaches the level specified by the trader.
In this example, the slippage amounted to only 2.5%, which is unlikely to be critical for the trader. However, according to analysts from major exchanges, during periods of high volatility, slippage in cryptocurrency can reach several tens of percent.
Although such situations can lead to significant losses, slippage in cryptocurrency markets can also yield unexpected profits. Traders call this "positive slippage"* in cryptocurrency, although such cases are quite rare.
* Positive slippage occurs when a trade is executed at a more favorable price than the trader expected. For example:
- wanted to buy at $78,000 → bought at $77,500 (profit);
- wanted to sell at $78,000 → sold at $78,500 (also profit).
How and why does slippage in cryptocurrency occur?
Before understanding where slippage comes from, it is necessary to understand which market indicators it is related to. The size of slippage in cryptocurrency depends on at least two factors:
- Liquidity of the trading pair on a particular exchange. The lower this indicator for a specific pair of assets, the stronger the slippage can be. This happens because there may not be enough matching orders in the liquidity pool at the desired price. As a result, the trade is not executed entirely at the stated rate but is partially executed at lower prices. This is especially relevant on decentralized exchanges, where many low-liquidity crypto pairs are available.
- Order size. The situation is similar here: the larger the trader's buy or sell order in a particular trading pair, the greater the actual slippage may be after execution. A large order can significantly change the asset ratio in the liquidity pool. Because of this, the average execution price becomes worse than the one the trader saw before submitting the order.
However, another indicator closely related to slippage is the spread — the difference between the bid and ask prices on exchanges.
If the difference between the lowest seller price and the highest buyer price is too large (from 1% or more), slippage may occur due to the high spread. The spread is also directly related to liquidity. The less liquid the asset, the larger the spread and the higher the probability of slippage when buying or selling.
Slippage in cryptocurrency can also occur for other reasons:
- Due to a sharp increase in trading volumes. When the number of trades suddenly rises, the asset price can change very quickly. While the trader's order is being sent and executed, available orders at the previous price may already be filled by other market participants. As a result, the trade is executed at a new, less favorable price.
- High network load and low blockchain performance (relevant for decentralized exchanges). This is especially true for decentralized exchanges. If the network is overloaded, a transaction may take longer than usual to be confirmed. During this time, the price in the liquidity pool may change, so the actual exchange rate differs from the one the trader saw when creating the order.
How to protect yourself from slippage in cryptocurrency?
There are several ways to protect against slippage, helping users avoid unnecessary risks.
Using limit orders
Slippage when trading on traditional exchanges mainly occurs with market orders, which are executed at the current price, which can change rapidly.
Using limit orders, which are available by default on all centralized exchanges, allows you to avoid slippage.
Pending orders guarantee that a buy or sell request will be executed only at the price specified by the trader, even if there is not enough supply in the market. This means the user will not be exposed to slippage, even if the order is only partially filled.
Setting acceptable slippage tolerance
Although some major exchanges, such as Uniswap and PancakeSwap, have long supported limit orders, this feature is not yet available on all decentralized platforms, which is why users still encounter slippage.
However, decentralized exchanges allow users to set slippage tolerance limits. Most often, exchanges set the default slippage at 0.5–1%, but this limit can be increased or decreased if desired.
Trading highly liquid assets
When trading highly capitalized assets such as Bitcoin (BTC) or Ethereum (ETH), even on smaller exchanges, slippage is rare and typically occurs only when placing very large orders.
To minimize slippage risks, it is not recommended to trade assets in pairs with liquidity below $1 million. This indicator can be checked on a cryptocurrency's page using services like CoinMarketCap or CoinGecko.
It is also advisable to avoid inactive trading pairs, as the risk of slippage will be quite high. In addition, pay attention to the spread: if it exceeds 2%, the probability of slippage is also high.
Using smaller orders
If the traded pair is low in liquidity, slippage can be reduced by placing several smaller orders instead of a single large one.
Another way to reduce slippage risk is to trade across multiple exchanges.
Using exchangers
Another method that helps prevent slippage is exchanging assets through physical or online exchangers.
On such platforms, trades are usually executed at a fixed price, provided that the company or seller has sufficient reserves. As a result, slippage is eliminated, unlike on traditional exchanges.