Crypto Glossary

Slippage

Slippage is a term used to refer to the price difference between a market order made on an exchange and the actual price paid. To understand this idea, you must first understand what a market order is.

A market order is when you place an order on an exchange to buy a coin at whatever the current market rate is.

Now, on an active exchange, the market rate for any coin is constantly on the move. It is constantly going up and down. So, when you come in there and place a market order to buy a particular coin, there is a little tiny time gap in there. This can occur because:

  • It just takes a few seconds for the exchange to actually execute your buy order.
  • Perhaps the amount of coin you are purchasing is such that the exchange has to break it up into multiple transactions. While those different transactions are executed pretty quickly back to back and might look fairly instant to you, in reality it might be executing several different buy orders for you until it fulfills your entire order.

In a very volatile market with a lot of price movement, these little time gaps introduce slippage. In the amount of time between when you place your order and the order is 100% fulfilled, the market price of the asset could change – or slip. It could slip either direction – up or down. The result is that you may pay a little more or a little less than where you placed your order. This is called slippage.

Slippage is caused by high market volatility. It can also be caused by low volume.

In most cases, the degree of slippage is pretty small and honestly not worth worrying about. However, if the volume of your trades is enough to worry about it, you can use order limits on the exchange to avoid slippage.

Some larger buyers will also make purchases outside of exchanges, through a brokerage or OTC (over the counter) firm. These middlemen will execute large transactions in such a way that it avoids the public exchanges and avoids slippage. As you can imagine, if a large buyer (like an institution) decided to make a large crypto purchase, the one transaction could move the market in a massive way if they did it on a public exchange. This would introduce a lot of slippage and cost money. For this reason, such purchases are often done OTC.

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