If you are conversant with the internet and trending topics of interest, you would have heard about ‘what you ordered versus what you got.’ Well, if you don’t know, let me brief you. When you see something nice and, say, “Yes! This is a good deal. I want it for myself”. And then you go placing your order or your money on that thing, but when it arrives, it leaves you wondering “What did I order again?” This is because your purchase might be slightly identical to what you got but it is not what you wanted. And then it becomes a case of ‘What I ordered versus what I got.”

You might think, how is this possible in crypto? Have you ever seen a perfect cryptocurrency deal? It could be to buy or sell a particular coin at a very good price. And then you go for it, only to discover that the estimated amount you expected is not what you got in return for the deal. Yes, that disappointment is likened to the ‘What you ordered versus what you got’ situation.

This situation in cryptocurrency is called slippage. Slippage is the difference between your expected trade outcome and the actual outcome. Generally, it occurs due to the volatile nature of the market. Also, it is not limited to crypto trading only, but also exists in the finance market. However, there is a high occurrence of slippage in the cryptocurrency market due to its fast-paced characteristics.

The causal factor of slippage may differ, depending on existing protocols. However, the major factors are market volatility, liquidity, and the size of your order. The stunning part about crypto trading is the way a twinkle of an eye can make a lot of difference, in a second, the price of tokens can rise or drop greatly.

Slippage in Crypto Trading: Good or Bad

Now that we have established the meaning of slippage, it is important to note that slippage is not always a bad thing. In contrast to ‘what I ordered versus what I got’, which always trends in case of disappointments. Slippage can also be a good thing. Given that the crypto market can rise or drop in the blink of an eye ( note rise and drop, not only drop). The time frame between your transaction exchange could have resulted in a rise or drop that could bring a benefit to your deal. However, this is not always the case. In light of this, we can say there are two types of slippage; positive slippage and negative slippage.

Positive slippage: in the case where a transaction occurs, and the price turns out to be better than the initial speculated price, a positive slippage has occurred. For instance, an order is placed at $1000 for a particular token, and the order is delivered at $990 due to a shift in the market. This kind of slippage has profited the trader more, hence, its positivity. The positive kind of slippage is always of higher profit to the trader than anticipated.
Negative Slippage: when a transaction is delivered at a worse price than initially speculated, it comes down to a loss for the trader. In an instance where a trader trades a token for a lesser price than anticipated due to a shift in the market ($100 deal becoming $98). In the case where the trader relies on the exact price of their order and negative slippage occurs it can amplify losses or even reduce potential profits.

What is Slippage Tolerance?

Due to the nature of the crypto market, it is evident that slippage is inevitable. However, there are levels of slippage that a trader can take. Imagine a slippage circumstance where a trader is making a negative profit (loss). Hence, there is a measure that can be established or laid down before a transaction is executed to state the level of slippage that can be tolerated for such translation. This is called slippage tolerance.

Slippage Tolerance is crucial for traders who want to minimize loss due to market volatility, or other slippage-causing factors. Because it is an agreement before the execution of a transaction between crypto dealers, stating the amount or percentage of slippage that can be accepted in the process of the transaction. If the slippage rates exceed this set limit, the transaction can be nullified. For example, a transaction agreement where a trader sets a slippage tolerance of 2% between the initial price and the execution price, means that the transaction will not be executed if the rate of slippage exceeds this limit.

Conclusion

Cryptocurrency trading is a lucrative business that comes with high risks. Nevertheless, you can reduce the effect of slippage on your transactions as a crypto trader, and maximize your profits and consistency in the long run. Be aware that slippage is an inevitable trading risk, and it is necessary to face it head-on with a disciplined and determined state of heart to be able to achieve success in the crypto trade.

Hence, crypto traders should be a step ahead of the game by setting a slippage tolerance before finalizing a deal.