When it comes to making profit from trading cryptocurrency, there are a lot of factors to consider.
One of the major factors that exist in profiting from trading is the cryptocurrency spread that exist in the trading market.
Cryptocurrency spread has a vital role to play in profitability from crypto tradiing.
This is because the very moment that you buy a cryptocurrency, you are automatically making a loss.
This is because you cannot instantaneously sell it at a higher price than what you just bought especially if you used market order to complete your trade.
This is due to the difference that exist between the ask price and the bid price.
This difference shows itself in the cryptocurrency spread that exist in the trading order book.
To make consistent profit as a crypto trader, understanding crypto spread is a very important skill to have.
In this guide, you will learn about cryptocurrency spread and how it affects the profit that crypto traders make.
What Is Cryptocurrency Trading Spread
Cryptocurrency trading spread is the price difference that exist between the ask price and the bid price in a crypto market.
When it comes to trading in the cryptocurrency market, the price of crypto is not always stable.
It fluctuates as more or less people try to buy cryptocurrency.
The price of crypto also fluctuates as more or less people show interest in selling their crypto assets.
The difference between the price a crypto sellers want to sell at and the price a crypto buyers want to buy at defines the spread that exist in that trading market.
How Does Cryptocurrency Trading Spread Work
Whenever there is trading of a cryptocurrency, two things usually happen.
These two things are supply and demand of the traded cryptocurrency.
The supply of a cryptocurrency is being created and controlled by the crypto trading market traders who want to sell their crypto.
When they put out their crypto coins for sale, they directly create a supply for that cryptocurrency in the trading market.
This is what creates the ask price in the order book of a crypto trading market.
The demand of a cryptocurrency is being created and controlled by the traders who want to buy a cryptocurrency in the trading market.
When buyers in a crypto market want to buy a cryptocurrency, they pick a price they want to pay for the crypto asset.
When this happens, a demand for the crypto in the trading market is created.
This creates a bid price in the order book of that crypto trading market.
The picture below shows the bid price and ask price in the crypto market.
The ask price is always higher than the bid price in the crypto trading market.
The difference that exist between the bid price and the ask price in the order book is what is called spread.
Cryptocurrency Spread Indicators
Crypto spread indicator is a measure that is used to show the spread that exist in a crypto trading market.
This is done by frequently checking the difference that exist between the bid price and ask price in a trading market.
Due to the results that you want, you can set it to check the spread across different crypto pairs within an exchange.
You can also set the crypto spread indicator to check the crypto spread that exist in a crypto pair across other exchanges.
This helps in making good trading decisions as it helps in planning a trade well.
How To Calculate Cryptocurrency Trading Spread
Knowing how to calculate the spread that exist in a cryptocurrency trading market is very important.
As a crypto trader, the spread that exist in the trading market directly influences the profit you make.
That is why it is very important for you to be able to calculate the spread correctly during trading.
This gives you an early hint if trading in that market will be profitable or not.
To calculate the spread in a crypto trading market, subtract the bid price from the ask price.
From the order book in the image above, we have the following information from the crypto trading market;
- Bid price of ETH is $3325.23
- Ask price of ETH is $3325.24
The spread = ( ask price – bid price ) = ( $3325.24 – $3325.23 ) = $0.01
Therefore the spread that exist in the trading order book is $0.01 or 1 cent per coin.
From the formula above, you can easily calculate the spread that exist in any crypto trading market.
This will go a long way in making your crypto trading profitable.
Crypto Exchanges With Best And Lowest Spreads
One of the things you must consider before trading in a crypto exchange is the spread that exist.
In some crypto exchanges, the spread is always very wide.
This will be hard for you to easily make profit when trading.
This is why it is very important to choose a crypto exchange with a low spread.
Some of the crypto exchanges that have consistency in having low spread include;
When you trade with crypto exchanges that have very low spread, your profit margin will have a positive change.
Why Is Spread Important During Trading
When you are trading cryptocurrency, you will discover that crypto spread plays a vital role in the profit you make.
Some of the reasons why spread is important when trading are;
1) Cryptocurrency Spread Influences Trading Profits
The profit that is made while trading is influenced by the cryptocurrency spread that exist in the order book.
When the spread is high, your chances of making more profit while trading is low.
If the crypto spread is low, the chances of you making profit while trading is high.
For example if in a trading market, the following instances might take place.
2) Crypto spread controls the chances of buying at a good price
When you want to buy your crypto assets, the spread will play a vital role.
Sometimes when you want to purchase a crypto, the price difference may be high.
When this happens, you may want to wait and see if the spread will reduce before buying.
This is because you want to buy at a good price.
This delays the speed of easily buying at a good price.
3) Crypto spread controls the chances of selling at a good price
When you want to sell your assets, the crypto spread that exist will affect the price you sell at.
When the spread is large, it will not motivate you to easily sell your crypto assets when you compare it to the price you bought.
The wait also delays you from speedily selling at a good price.
What Affects Crypto Trading Spread
Crypto spread changes as a result of some situations in the trading market.
Some of the factors that affect crypto spreads are;
- Market Volatility
When the volatility that exist in the crypto market is high, it affects the spread of the market.
This is because prices of a crypto asset will be moving up and down at a very fast pace.
When the volatility is low, the rate at which the spread changes is low.
This helps in maintaining a stable value of crypto spread in the trading market.
- Relevance Of The Cryptocurrency
It is a very common thing to see high crypto spreads with coins that have less relevance in usage.
Such coins are used to promote the pump and dump schemes.
Due to the pump and dump actions that goes on, it causes the price of the crypto to move erratically.
When this happens, a large size of crypto spread is always commonly seen.
- Liquidity of Crypto Asset
When the liquidity of a cryptocurrency is low, this will affect the spread in the trading market.
Low liquidity in a trading market can exist in either the ask price or in the bid price.
When this happens, traders with large volume of crypto assets make the price high as there is less competition due to low liquidity.
But when the liquidity is high in a crypto trading market, the competition is usually high among traders.
This makes the traders place competitive prices thereby reducing the difference between the bid and the ask price.
When this happens, the crypto spread that exist in that trading market becomes low.
How To Trade Crypto With Low Spread For Trading Profit
Crypto spread varies across different trading markets and exchanges.
To make your profit consistent, there are some considerations you have to follow to reduce the crypto spread when trading.
1) Trade With Exchanges That Offer Low Trading Spread
There is one important thing that consistent traders usually check for in a crypto trading exchange.
This is no other than the crypto spread in a trading market.
This is because crypto spread is one of the deal breakers as far as profit is concerned when trading cryptocurrency.
When you trade cryptocurrency for profit, your focus is on how you can quickly sell back your crypto at a profit.
This is usually greatly influenced by the spread that exist in the trading market.
A lot of cryptocurrency exchanger cut into the profit of their traders because the spread in the trading market of their exchange is high.
This is why you should trade with exchanges with low spread.
One of the most consistent crypto exchange with a good track record of low spread is binance.
This is why binance is the go to place for the world biggest crypto traders.
This large trading volume has made binance the largest crypto exchange in the world by trading volume.
If you do not have an account with them, you can sign up an account or learn how to open a binance account.
2) Trade on Markets With High Liquidity
When there is a low liquidity in a crypto trading market, it really affects the spread.
This will affect the spread in a negative way.
This is because it will be difficult to buy a large volume of crypto at a good price.
This is due to the different quantities of crypto that will exist in different prices.
This case is shown on the image below
3) Do Not Trade In Markets With High Volatility
Large crypto spread is easily seen in trading markets that have high volatility.
When the volatility of a trading market is high, the rate at which the price of cryptocurrencies change is very high.
Due to this erratic nature of prices, the crypto spread also becomes unstable.
When this happens, the spread between the bid and the ask price is usually large.
This affects the profit that is made during trading of a cryptocurrency.
4) Compare The Spread across Other Markets
This is a very important step to follow when trading cryptocurrency.
If you observe that a particular trading market has a low spread, low liquidity or has a high volatility, check the conditions of other trading pairs.
For example if you want to buy ADA/USDT and you observe that the spread and volatility is high there, check other pairs.
You can check other pairs like ADA/BTC, ADA/BUSD or other trading pairs of ADA that you can find good conditions to trade.
Conclusion On Crypto Spread And How It Affects Trading Profits.
To keep making consistent profit while trading cryptocurrency, you have to check crypto spreads well.
Checking the crypto spreads that exist in a trading market will give you a good decision making tips when making a trading plan.
This guide has shown how important crypto spreads if you want to record consistent profits with crypto trading.
Have a profit filled trading time.