Table of Contents
In the crypto space, the term slippage refers to the discrepancy between how much someone expects or anticipates paying for a particular crypto asset, and how much they actually end up paying for it. In other words, slippage is the difference between the expected price and the executed price, which may occur for a number of reasons, including volatility or low liquidity in the market.
Slippage, then, has some obvious implications for anyone buying or selling digital assets in the crypto market. Read on to learn more about slippage, why it occurs, and how, or if, you may reduce its impact on your financial plan and overall portfolio.
Key Points
• Slippage is the difference between the expected and actual prices in crypto transactions.
• Slippage may benefit or disadvantage buyers and sellers, depending on market conditions.
• Insufficient liquidity, price volatility, and network delays are primary causes of slippage.
• Market participants should set a slippage tolerance, usually between 0.25% and 1%.
• Transacting on high-volume platforms and during high liquidity periods may reduce slippage.
Understanding Slippage in Crypto
As noted, slippage refers to the difference between the expected or anticipated price of a digital asset, and the price that a market participant ends up actually paying. It’s important to note that slippage can work for or against someone looking to buy or sell a digital asset; that means that you could end up slightly ahead after a transaction, or slightly behind, depending on which way the slippage occurs.
Slippage occurs in other areas of the financial markets, too.
For instance, slippage occurs in equities, or the stock markets. It can happen in bond and foreign exchange markets, also referred to as Forex trading. It happens pretty much anywhere that financial assets are being bought or sold. The typical drivers of slippage are low trading volume or frequency, or low liquidity. That happens when there’s a relative shortage of participants in a market — it may take a short period of time to match a buyer and seller, and within that time frame, bid and ask prices change, or slip, slightly.
Here’s an example: Say someone wants to buy a specific municipal bond over-the-counter. The individual’s brokerage can and will facilitate the purchase, but the bond has fairly low liquidity. The bond’s price hits a level that the individual finds acceptable, so they decide to execute the transaction and buy the bond.
However, due to the bond’s low liquidity, it takes a short time for the brokerage to negotiate and fill the order. During that time, the bond’s price increases, or slips up, slightly. When the order executes, the buyer has paid a slightly higher price than anticipated or expected — they have witnessed slippage first-hand.
The same scenario could play out in almost any financial market, including the crypto space.
Crypto is coming
back to SoFi.
The new crypto experience is coming soon— seamless, and easy to manage alongside the rest of your finances, right in the SoFi app. Sign up for the waitlist today.
What Causes Slippage in Crypto?
There are a few main drivers of slippage in the crypto markets, including liquidity levels, volatility, and transaction delays on blockchain networks or crypto exchange.
Low Liquidity
As discussed, asset liquidity and volume levels can be a primary driver of slippage, especially in the crypto markets. While low liquidity may not be a key factor for certain larger cryptos, such as Bitcoin (BTC), smaller cryptocurrencies, with smaller market caps or total presence on the markets, could experience slippage as brokers require more time to match buyers with sellers — who may be scarcer.
High Volatility
The crypto markets tend to be highly volatile, with major price swings being fairly common. With swift market movements, asset prices are likewise shifting up and down rapidly, making it more likely that prices could “slip” between the time an order is placed and it is executed. So, the more volatile the market, the more likely it is that slippage could occur.
Network Delays
Crypto transactions take place on blockchain networks, and those networks can and do get busy if many participants are trying to execute transactions. During those times, transactions could be delayed, and during those delays, prices could slip. Similar to volatility on markets, the busier or more congested a blockchain network is, the more likely participants are to experience slippage.
It’s also important to note that the crypto markets never close – they operate all day, every day. There are also different exchanges with different operating procedures, and not all of them offer every cryptocurrency. So, that could be yet another factor that can cause slippage to occur.
Positive vs Negative Slippage
As discussed, slippage can work against or for market participants. Or, put another way, it’s possible that someone buying or selling a cryptocurrency could see the price slip up or down in a way that nets or saves them money on the transaction, or vice versa.
Positive slippage: For example, if you were buying a cryptocurrency at a price of $1, and the blockchain network was experiencing delays due to congestion, the execution of the transaction could get hung up. During that stretch, the price of the cryptocurrency in question slips down to $0.95, and is then executed. You would have actually saved money during the transaction due to slippage.
Negative slippage: Conversely, the price could also slip the other direction. Say during the network delay, prices slipped to $1.15 — in that case, you’d actually be paying more than anticipated due to slippage, and probably be pretty irritated about it. But such is the risk of participating in the crypto markets.
How Is Slippage Calculated?
To calculate slippage in crypto, you’ll need to do some simple calculations. In fact, it’s more or less looking at the difference between two prices — so, some simple subtraction. Remember, though, that slippage can be either positive or negative.
But if you want a formula, this one should do the trick:
Crypto Slippage Formula and Example
Formula: Slippage (as a percentage) = (Executed price – expected price) Ă· expected price x 100
Example: So, playing this out in an example, imagine that you’re expecting to buy a digital asset for $10, but there is a slippage of ten cents. As a result, your executed price is $10.10.
Accordingly, the equation looks like this:
Slippage = (10.1 – 10) Ă· 10 x 100
That calculates out to 1, or 1%. There was a negative slippage of 1%.
How to Reduce Slippage in Crypto Transactions
If the prospect of slipping has you concerned, rest easy, as there are a few techniques you can use to reduce the chance of slippage in your crypto transactions.
Determine a Slippage Tolerance
Similar to how someone might determine their risk tolerance level when buying or selling other types of market assets, it may be helpful to determine a slippage tolerance before transacting any crypto. That means you’re going into transactions aware that slippage may occur and cost you a bit of money. Knowing that, how much slippage are you okay with? Think about it — it may be a good ballpark number to think of being okay with slippage ranging between 0.25% and 1%, for example.
Some crypto platforms allow you to set your slippage tolerance level. Keep in mind that entering a lower tolerance percentage could cause you to miss the opportunity to buy or sell a cryptocurrency, though of course setting it too high could result in you paying a price you may not be comfortable with.
Using Limit Orders
Another option to consider to reduce the impact of slippage is to set a limit order, which will only execute when the cryptocurrency reaches the limit you set, or a better price. As with setting a tolerance level on the platform, the risk is that you may miss out on an opportunity to buy or sell the cryptocurrency if your limit is too tight. Taking factors such as the crypto’s volatility level into account may also inform the tolerance level you choose.
Use Platforms With Deeper Liquidity
Since low liquidity and asset volume can be a prime driver of slippage, it may be a good idea to use platforms with deeper liquidity and higher volume in an effort to avoid or reduce slippage. Again, there’s no guarantees, but busier platforms may have reduced instances of slippage.
Transact During High-Volume Periods
Similarly, you can try and make your transactions during times when there are many other market participants in the mix. That’s another way of saying that there’s high liquidity and market volume, again, reducing the chances of slippage. Along those same lines, you’ll want to try and avoid volatile periods, or cryptocurrencies with fewer transactions (low liquidity). Remember, as well, that factors such as volatility and liquidity may vary depending on the type of cryptocurrency you’re purchasing or selling.
Risks to Keep in Mind
There’s likely no avoiding a certain amount of slippage in the crypto market, so you may want to think of it as one of the broader elements at play in the crypto space. That includes relatively high volatility, unpredictable levels of demand, and evolving technology and regulations. The crypto space, though becoming more mainstream, is still rife with risk.
Further, know that there will be costs associated with crypto transactions. Slippage could be a part of that, but blockchain networks may also levy gas fees, the transaction fees crypto users pay to cryptocurrency validators, or other types of fees on participants.
The Takeaway
Crypto slippage is, in simple terms, the difference between an expected crypto price and the actual, or executed price. It can work both ways — someone transacting in crypto may end up paying more than anticipated, or paying less as a result of slippage.
While there’s likely no avoiding it completely, there are things you can do to try and diminish slippage’s effects, such as establishing a slippage tolerance level, and transacting on high-volume and high liquidity platforms.
Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.
FAQs
What causes slippage in crypto markets?
Slippage is most commonly caused by low liquidity or order volume in the crypto markets, and that’s generally true for the broader financial markets, too. It can also occur due to network congestion or delays on blockchain markets, more specifically to the crypto space.
Is slippage always a bad thing?
Slippage can work to a market participant’s advantage if prices slip in their favor, and they end up saving money or spending less. So, no, slippage is not always a bad thing.
What is a good slippage tolerance percentage to set?
An overall slippage tolerance will vary from individual to individual, but it may be a good target range to have a tolerance of 0.25% up to 1% or so. That may depend, too, on specific crypto assets that are being bought or sold.
How is slippage calculated in a crypto transaction?
Slippage is calculated by finding the difference between the expected and executed price. The formula looks like this: Slippage (as a percentage) = (Executed price – expected price) Ă· expected price x 100.
Can you completely avoid slippage on a decentralized exchange (DEX)?
No, you likely can’t completely avoid slippage on a decentralized exchange, but there are things you can do to try and minimize slippage.
About the author
Samuel Becker
Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.
Photo credit: iStock/Marc Bruxelle
CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.
SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOCRYP-Q325-113