Slippage In Crypto: What It Is And How To Minimize It

Slippage is one of those nuanced aspects of crypto trading that beginners often forget to consider. So, what is slippage in crypto? Simply put, slippage refers to the difference between the expected price of a trade and the actual price at which it gets executed. 

This often happens in fast-moving or low-liquidity markets. Knowing the slippage meaning and how it affects your trades can save you from unnecessary losses.

In this guide, we’ll cover the slippage definition in detail and explore common causes. Let’s dive in and make sense of slippage in crypto trading.

What is slippage?

Slippage in crypto happens when the price you expect to pay for a cryptocurrency is different from the price you actually pay when the transaction goes through. This usually occurs because prices can change quickly, especially in highly volatile markets.

For example, imagine you’re buying a cryptocurrency for $100, but by the time your transaction is completed, the price has moved to $102. That $2 difference is slippage. It can also happen when selling, where you might expect $100 but only get $98.

Here’s why slippage happens:

1. Market volatility: Prices can swing wildly, especially for smaller or newer cryptocurrencies.
2. Liquidity Issues: If there aren’t enough buyers or sellers at your desired price, the system moves to the next best available price to complete the transaction.
3. Large orders: When you place a large trade, it might take multiple transactions to fill it, causing the price to shift as the order is processed.

Many platforms offer a ‘slippage tolerance’ setting to manage slippage. This lets you set how much price difference you’re willing to accept before the transaction fails. For instance, you could set it to 1% or 2%, meaning you’re okay with the price changing slightly but not too much.

Key factors that affect slippage

1. Market liquidity

Liquidity means how easily you can buy or sell an asset without affecting its price. High liquidity means lots of buyers and sellers, while low liquidity means fewer participants.

• High liquidity: Minimal slippage since there are enough people trading at or near your desired price.
• Low liquidity: Greater slippage because there aren’t enough orders at your desired price, so the system pulls from higher/lower prices to complete your trade.

Example: Popular tokens like Bitcoin or Ethereum generally have lower slippage because of high trading volumes. Rare or new tokens often have higher slippage.

2. Order size

The size of the trade matters because larger orders can consume available liquidity at your price point.

• Small orders: Less slippage because they can often be filled entirely at the desired price.
• Large orders: More slippage since filling a big trade might require pulling prices from multiple levels in the order book.

Example: Imagine you want to buy $10,000 worth of a token, but only $5,000 worth is available at your desired price. The remaining $5,000 might be filled at higher prices, leading to slippage.

3. Market volatility

This refers to how quickly and dramatically an asset’s price changes. Crypto markets are infamous for their high volatility. In fast-moving markets, prices can change between the time you place your order and the time it’s executed.

Example: During a market crash or rally, slippage spikes because prices are constantly moving, and your order might be executed at a less favorable price.

4. Order type

• Market orders: These are executed immediately at the best available price. They’re quick but prone to slippage since you’re accepting the current market conditions.
• Limit orders: These let you set a specific price. They avoid slippage because the trade only happens if your price is met, but there’s no guarantee the order will be filled.

5. Exchange or trading platform

Different platforms have varying levels of liquidity, user bases, and execution speeds.

• A larger exchange like Binance or Coinbase typically has more liquidity and faster execution, reducing slippage.
• Smaller exchanges or decentralized exchanges (DEXs) may have higher slippage, especially for tokens with low trading volume.

Example: On a DEX like Uniswap, slippage can be high for smaller tokens due to lower liquidity in the liquidity pools.

6. Time of trade

The time of day affects market activity and liquidity. High activity periods (like during major news or events) can cause more volatility and slippage. Off-peak hours may lead to lower liquidity, increasing slippage.

Example: A trade placed during a global market announcement (e.g., a Bitcoin ETF approval) will likely face high volatility and slippage.

7. Gas fees and network congestion (for DEX trades)

On decentralized platforms, trades require blockchain transactions, which are affected by network traffic. High traffic means slower execution, and prices can change before your trade is completed.

During NFT launches or meme coin rallies, Ethereum network congestion can lead to significant delays and slippage.

How to calculate slippage?

Calculating slippage is super simple! You just need two things:

1. The price you expected (let’s call it expected price).
2. The price you actually paid (let’s call it actual price).

Here’s the formula:

Slippage (%) = (Actual price − expected price) / expected price × 100

Let me show you how this works with an example:

• Expected price: $100
• Actual price: $102

Slippage = (102−100) / 100 × 100

In this case, you experienced 2% slippage.

If you’re selling, the formula is the same. Here, the slippage is still 2%, but it’s in the opposite direction because you sold for less than you expected.

Key tip: Always check your slippage tolerance settings if you’re using a trading platform. It helps prevent trades from going through if slippage exceeds what you’re okay with. Let me know if you need help with setting that up!

What happens if slippage is too high?

If slippage is too high, it can hurt your trade in several ways. Here’s what you need to watch out for:

1. You pay more (or earn less)

When slippage is high:

• For buyers: You pay a lot more than you expected. This means fewer tokens for the same amount of money.
• For sellers: You get less money than you anticipated for your tokens.

Example: If you expected to buy at $100, but the price jumps to $120, that’s 20% slippage. It directly eats into your profits or increases your cost.

2. Failed transactions (on DEXs)

On decentralized exchanges (DEXs), high slippage can cause your transaction to fail if your slippage tolerance is set too low.

Example: If the price moves by 5% but your slippage tolerance is set to 2%, the trade won’t go through. This is common during high network congestion or for low-liquidity tokens.

3. Loss of value on large trades

If you’re trading a large amount of a token in a low-liquidity pool, your trade can significantly push the price against you.

Example: Imagine you’re trying to buy $10,000 worth of a small token. If the liquidity pool doesn’t have enough supply at your target price, you’ll end up paying much higher prices as your trade consumes liquidity at each level.

4. Unintended consequences in arbitrage

High slippage affects strategies like arbitrage, where small price differences are exploited. Slippage can completely wipe out profits, making the trade a loss instead.

5. Rug pull or scam risk

Excessive slippage might indicate manipulation, especially with low-volume or new tokens. Scammers can create tokens with poor liquidity to trap traders into paying outrageous prices.

How to minimize slippage?

To minimize slippage, start by trading tokens with high liquidity. Larger, well-established cryptocurrencies like Bitcoin and Ethereum typically have lower slippage because there are more buyers and sellers in the market. Stick to platforms or exchanges known for handling high trading volumes since they can process your orders faster and closer to your expected price.

Another simple strategy is to avoid using market orders when possible. Market orders prioritize speed, but they’ll execute at whatever price is available, which can lead to significant slippage in volatile markets.

Instead, use limit orders to specify the maximum price you’re willing to pay (or the minimum you’re willing to accept). This gives you control and ensures your trade only goes through at a price you’re comfortable with.

Timing matters too. Try to trade during periods of low volatility. Avoid making trades during major announcements, sudden market crashes, or rallies because prices can move unpredictably. Also, consider trading during times when the market is most active, as liquidity tends to be higher then.

If you’re using decentralized exchanges, set a reasonable slippage tolerance. Most platforms let you adjust this in the settings, and keeping it tight (but not too tight) can help you avoid overpaying. Finally, break down large trades into smaller ones.

This reduces the impact on liquidity and spreads the trade over multiple price levels, helping to keep slippage lower. These simple adjustments can make a big difference in avoiding unnecessary losses.

To sum it up:

1. Set slippage tolerance: Platforms let you cap how much slippage you’re willing to accept (e.g., 2%).
2. Trade during stable times: Avoid trading when markets are volatile or during high-demand periods.
3. Use limit orders: On centralized exchanges, use limit orders to lock in your desired price.
4. Research liquidity: Check the trading volume and liquidity before placing large trades.

High slippage can make or break your trade. Keeping an eye on these points will help you avoid nasty surprises.

1. 01.

   Is higher or lower slippage better?

   

   Lower slippage is always better because it means the price you get is closer to what you expected, reducing unexpected costs or losses.

2. 02.

   Is 2% slippage high?

   

   It depends on the market. For highly liquid assets like Bitcoin, 2% is considered high. For low-liquidity tokens or during volatile periods, it’s fairly common.

3. 03.

   What is the purpose of slippage?

   

   Slippage reflects market conditions and ensures trades are executed even when prices change slightly. It helps complete orders in fast-moving or low-liquidity markets.