Slippage in crypto trading is the difference between the expected trade price and the actual executed price.
- Slippage is caused by a lack of liquidity, the size of the order, and market volatility.
- While it is impossible to completely avoid, you can reduce slippage by setting limit orders, splitting the size of large orders, and trading in more liquid pairs.
Understanding slippage
Slippage mostly comes down to liquidity and market volatility.
Liquidity refers to whether a market (or a crypto platform) has a large pool of buy and sell orders that absorb your trade without significantly moving the price.
In a low-liquidity market, you might see a large gap between the first buyers’ and first sellers’ prices, referred to as the spread. The spread can vary between different tokens and exchanges.
In volatile markets, price changes are often sharp and unpredictable, increasing the chance that the price you see when placing an order (whether to buy or sell) won’t match the executed trade.
A market can be volatile yet liquid, or stable but illiquid, both combinations can affect your trading experience in different ways.
Slippage on exchange order books
Slippage doesn’t just come from market conditions — it also depends on how your trade is executed on an exchange. Let’s look at what actually happens when you place a trade.
When you place a buy or sell order on an crypto exchange, you are not trading with the exchange itself. Instead, you’re trading with other users on that exchange’s platform.
The role of the exchange is to match buyers and sellers, which exchanges like Independent Reserve do through order books.
See below for an example of the order book for buying Bitcoin.
In the example above, buyers and sellers list their desired price and the volume of Bitcoin they want to buy or sell.
If we wanted to buy Bitcoin, we would buy from the first sell order ($171,567). If our desired purchase exceeds the available amount of Bitcoin being sold by the first seller(s), we would then buy from the next seller(s) down the order book. This is what creates price movement and slippage.
Best ways to avoid crypto slippage
While it is not possible to eliminate slippage, there are proven strategies to minimise its impact:
- Use limit orders: A limit order lets you set the price at which you’re willing to buy or sell, so the trade will only execute at that price or better. This helps minimise risk, particularly in less liquid markets or during times of sharper price fluctuations. However, you may not be guaranteed that your limited order will be executed if the market moves in the opposite direction.
- Break up large orders: Consider breaking large trades into smaller orders, as this gives the market a better chance to absorb your trades and avoid significant price slippage.
- Monitor the order book: Before placing a trade, examine the depth of the order book to gauge the market’s liquidity for that asset. Look for a narrow spread of buy and sell orders.
- Trade in liquid pairs and markets: Major cryptocurrencies (BTC, ETH and top alt coins) paired in AUD, USD or SGD tend to have more buyers and sellers, resulting in tighter bid spreads.
- Use an OTC desk: An over-the-counter (OTC) desk handles large trades that would typically incur slippage in a single market. For trades over $50,000, Independent Reserve’s OTC desk can help minimise price slippage on large orders.
Slippage on decentralised platforms
Decentralised platforms (DEXs) like Uniswap or PancakeSwap use liquidity pools. Instead of matching buyers and sellers, they use smart contracts to calculate prices based on how much of each token is in the pool.
When you place a trade, you’re swapping directly with that liquidity pool. As with order books, if your trade shifts the pool balance, slippage may occur. Blockchain delays during high network congestion or slow order confirmations can also exacerbate slippage, as the pool may change significantly before your transaction is executed on the network.
Most DEXs show you the estimated slippage before you confirm the trade, and let you set a maximum slippage tolerance. If the final price exceeds that, the transaction fails, helping protect you from major price swings.
