Spread is the difference between what people are willing to pay for an asset and what they’re willing to sell it for. It’s the gap between the price at which you wish can buy and the price at which you can sell an asset.
Cryptocurrency spreads are the difference between the purchase price and the sale price of a given pair. A large spread point results in an increased number of transactions with a certain amount of cryptocurrency, which negatively affects its liquidity. The main reason for cross-rates volatility is that there are many traders on one market influencing it with their orders simultaneously.
Table Of Contents
- Why is market spread important when buying and selling cryptocurrency?
- What does Spread in Cryptocurrency Trading Signify?
- What affects the Spread of cryptocurrency?
- How does Spread Trading work?
- 7 Factors that determine a spread
- 5 Benefits of spread trading
Why is market spread important when buying and selling cryptocurrency?
When buying and selling cryptocurrency, it is important to understand the market spread. The market spread is the difference between the buying and selling prices of a security or asset. This difference can have a significant impact on the profitability of a trade.
For example, if an investor buys 1 bitcoin for $10,000 on one exchange and sells it for $10,500, the market spread is 5%. This means that the trader will make a profit of only $500.
However, if the trader buys 1 bitcoin for $10,000 on one exchange and sells it for $9,000, the market spread is 10%. This means that the trader will make a loss of $1,000
So, you need to find the best market spread for your trade. You can do this by comparing multiple exchanges or markets that list the same asset pairs.
What does Spread in Cryptocurrency Trading Signify?
A spread signifies the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to sell it for.
Fundamentally, a larger spread signifies that the current perceived value of the market is very low, and there is no big demand for the token.
A larger spread will indicate a volatile market where the coin is in demand by traders, the bigger the spread, the higher the volatility of the token.
A spread that is too small will indicate that there are just too many trades happening at one time, which can also mean that there could be an imbalance in the market.
A spread of 0, consequently, means that the buy and sell price matches, so it means the token is not being traded at all.
Different cryptocurrencies have different spreads, depending on market demand and supply. When you trade coins at one exchange with very high spread, you’ll find that these coins will be cheaper at another exchange with lower spread making way arbitrage opportunities
What affects the Spread of cryptocurrency?
The main factors that affect cross rates volatility are the result of multiple players on one market influencing it with their orders simultaneously. Big buy or sell walls influence the price greatly and leave a big footprint on the charts. There’s not much you can do about it, but to find markets with low spreads.
How does Spread Trading work?
The following three prices are the most significant in an order book:
- The highest bid price.
- Lowest sale price.
- The last price traded.
The highest bid price is the price at which somebody is willing to buy a cryptocurrency.
The lowest sale price is the price at which somebody is willing to sell a cryptocurrency.
The last price traded refers to the volume of a digital currency that was sold or bought in a particular transaction.
Now consider an example with orders on the market: The highest bid price = $1000 The lowest sale price = $1050
Therefore, the spread point is $1050-$1000=50.
7 Factors that determine a spread
- Market Depth – If there are many buy or sell orders on the market, it will be either increased or decreased by traders. A large number of trades would cause a difference in price.
- Currency Availability – If the coin is not available on that top exchanges, then there is a higher chance of the spread being bigger.
- Market Manipulation – A sudden surge of buy or sell orders can cause an increase in volatility and fluctuations in prices.
- Limited Coin Supply – A limited number of coins or tokens affect the market spread due to the fact that there is a limited number of coins available.
- The Volatility of the coin – The higher the volatility of the coin, the bigger the spread.
- Liquidity – A higher volume of trade will increase the liquidity and also reduce the volatility. The more liquid a cryptocurrency, the smaller the spread.
- Market Sentiment – If traders are excited or worried about cryptocurrency news, they will either buy or sell increasing volatility of the market making the spread wider.
- Big Players – The whales of the market can dump a coin in a matter of seconds, or buy it all up making the spread bigger and increasing volatility.
5 Benefits of spread trading
- You can avoid losing all your money in a single transaction.
- You may make more transactions without spending large amounts of money on commission fees, inter-exchange commissions and etc.
- If you are using one exchange only, the spread point will show you if this particular exchange is making its rates artificially high or low. The smaller the spread, the more competitive this exchange is.
- If you are using multiple exchanges, it will allow you to compare prices and identify arbitrage opportunities.
- By analyzing spreads of different exchanges, you can make conclusions about the state of the cryptocurrency market in general. The lower the spread points are, the higher liquidity there is on a market.
What does a high spread mean?
The higher the spread, the lower liquidity there is on a market. In other words, it means that this particular cryptocurrency is traded at overpriced rates on that particular exchange.
What does a low spread mean?
The lower the spread, the higher liquidity there is on a market. In other words, it means that this particular cryptocurrency is traded at competitive rates on that particular exchange.
What is spread trading?
Spread trading refers to buying and selling cryptocurrencies at various exchanges, with a small difference between prices. It’s done to make profit from price fluctuations of certain cryptocurrency pairs.
What is arbitrage?
Arbitrage refers to the process of making profit by taking advantage of the difference in exchange rates.