Headline:  What is “slippage” with respect to cryptocurrency?

Body:  I keep running into a word in cryptocurrency research that is giving me some pause.   I speak of “slippage.”  In layperson terms, this is the difference between expected price, and the price that the transaction is actually executed at.  Let’s take an easy example.   You see a stock you want to purchase on an investing app, and it closed at $5 per share, and you told them to get you the best price at the market.  When all is said and done, you might be paying $5.50 per share, and you might be paying $4.50 per share.  Regardless of direction, the difference is called slippage.  Usually, it is not a big deal.

Unless you’re talking about cryptocurrency.  Stocks do bounce around a bit, but usually, the delta from the expected is fairly low.  Moving to cryptocurrency, however, the price at which you accrue ownership of cryptocurrency can change massively, without notice, and the timescale can be quite abbreviated.   So, let’s talk about slippage.

What is slippage?

Slippage is the difference between the expected and executed prices of a transaction.   Note, this can be either in favor of or at the expense of the buyer.  The delta (not direction)  is important here.     The reasonably inquisitive sort would ask the next question, namely, what causes slippage to be extreme?    There are 3 main causes, high volatility,  low liquidity and  smart contracts that account for taxes..    And guess what?   Cryptocurrency often falls victim to BOTH!!  By now, nearly everybody is used to seeing BTC change by hundreds of dollars or more per day, so price volatility is high.  Now, BTC and Ethereum often have ready markets, but what if you are trying to invest in something like Dogecoin?  You might have some difficulty finding a counter-party to take the other side of that trade, and this timing difference could cause substantial slippage.

What can I do to manage slippage?

There are a few things you can do:

  1.  Keep your trading only for cryptocurrencies that always have a ready market, like BTC or Ethereum (there are a few more that are OK, just these occurred to me off-hand.)
  2. Instead of using a market order, use a limit order.   If you use a “market” order, the exchange will find you the most advantageous price for the currency, but this could still be a distance away from the price you were expecting.   With a “limit” order, you can prescribe what price you will accept.   The downside is that you might not complete your entire transaction, especially if trading volume is lite.
  3. If trading on a decentralized exchange (especially DEX), you can prescribe the amount of slippage you will accept.
  4. Which exchange you use will certainly affect your profit or loss your amount of slippage as, some currencies are actively traded on some exchanges, and some are not.   Buyer Beware.
  5. Break down trades into smaller pieces.   Let’s say you need to sell 1,000 Monera.   It might be in your best interest to sell in 4 batches, 250 coins at a time.

The Verdict

This boils down to uncertainty.  Until your trade executes (fully or partially at the deadline) you are not going to be assured of the price.   It could be less (Yeah) or it could be more (BOO!) than you expect.  This is true of a normal stock transaction too (say you make a ‘trade” at night the execution will be the next day.)  The point is that you need to leave a margin of safety in your liquid assets in case the slippage is against you.  If this is likely to cause sleepless nights, you might want to shy away from cryptocurrency.  On the other hand, if you’re only investing what you can truly stand to lose, the prospect of a quick, unexpected win could be exhilarating.  Buyer Beware has never been this true.





Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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