ENTIRE QUESTION

1. Properly explain the Bid-Ask Spread.

2. Why is the Bid-Ask Spread important in a market?

3. If Crypto X has a bid price of $5 and an ask price of $5.20,
   a.) Calculate the Bid-Ask spread.
   b.) Calculate the Bid-Ask spread in percentage.

4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
   a.) Calculate the Bid-Ask spread.
   b.) Calculate the Bid-Ask spread in percentage.

5. In one statement, which of the assets above has the higher liquidity and why?

6. Explain Slippage.

7. Explain Positive Slippage and Negative slippage with price illustrations for each.

1. Properly explain the Bid-Ask Spread.

All market is made up of buyers and sellers who are willing to buy up a product at a particular price or sell at a particular price. Often at times, we see a difference between the price a buy and seller is willing to buy or sell a particular product and the crypto market is not unique to this.

In the crypto market, the price at which a buyer is willing to buy an asset is known as the bid price and the price a seller is willing to let go of his or her asset is known as the ask price. So let's say David has 1btc but is willing to sell at 50000$, we call this the ask price of the BTC and let us say like wishes to say this but he is pricing it at 49600$ we have the bid price at 49600$

The difference between the price the buyer values the token at and how much a seller is willing to sell the token is what is known as bid and ask spread so from the story above, we can it is the difference between 50000$ ask price and 49600$ bid price.

Ask price(50000$) - Bid price(49600$)=Bid-Ask Spread(400$)

2. Why is the Bid-Ask Spread important in a market?

This spread is very important cause it helps us determine how liquid a market is. check it out, won't a transaction go through faster when the buyer and seller are speaking the same language, that is the price range the seller and buyer are quoting are either the same or the range is very close, in other words, we see the asking price and bid price close resulting to a tiny or no bid-ask spread at all.

So the bigger a spread, we see a less active market but when the spread is smaller, we see transactions going through very fast and when we see a place where this is happening we can say the market is liquid cause of the fast speed of transaction while the earlier one is called illiquid market

large bid ask spread=less active market /slow transaction =illiquid market
small bid ask spread =more active/faster market =liquid market

3. If Crypto X has a bid price of $5 and an ask price of $5.20, a.) Calculate the Bid-Ask spread.b.) Calculate the Bid-Ask spread in percentage.

Let us list the values we are using which are
bid price= $5
ask price=$5.20
We have the formula below;

Ask price - Bid price=Bid-Ask Spread

$5.20 - $5=$0.2
Bid-Ask Spread=$0.2

For the percentage the formular is as follows:

%Spread = (Spread/Ask Price) x 100
%Spread=(0.2/5.2)x100
%Spread=3.84%

4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80, a.) Calculate the Bid-Ask spread.b.) Calculate the Bid-Ask spread in percentage.

Let us list the values we are using which are :
bid price=8.40
ask price= $8.80
We have the formula below;

Ask price - Bid price=Bid-Ask Spread

$8.80 -$8.40 = 0.4

For the percentage the formula is as follows:

%Spread = (Spread/Ask Price) x 100
%Spread =(0.4/8.80) x 100
%Spread = 4.54%

5. In one statement, which of the assets above has the higher liquidity and why?

The market in question 3 has higher liquidity. The reason is because of the low bid-ask spread it has which is a value of 0.2$ spread which shows small variation between prices the buyers and sellers are calling making it a market where the transaction would happen easier unlike the other where there is still much variation between them.

6. Explain Slippage.

Often at times, when we put to take a trade we see the variance in the price we wish to actually buy or sell the asset and what we ended up buying with. This is due to the highly volatile nature of the crypto market with the market changing at a very fast speed which is shocking at times. due to these changes, we see slippage occurring in the value we wish to take a trade at.

Sometimes, we see the price increase while sometimes we see the price decrease and this may favor one trade if one depending on what he wishes to do see price increase so he gets more or decreases so he gets more at a lower price or it can totally go against him too.

7. Explain Positive Slippage and Negative slippage with price illustrations for each.

Like I said above, there are situations where we see the slippage favor one as a trader where maybe we wish to buy an asset at a higher price but then due to volatility of the market we get the asset data lower price meaning that we got more and at a lower price or one wishes to sell and sees his trade been sold at a higher price than he or she expected but some times this doesn't happen this way leading to the grouping of slippage into two types :

1. Positive slippage
2. Negative slippage

POSITIVE SLIPPAGE

Here the change in price due to volatility favors the trader well and we can see such a situation where is he is trying to sell a value at a price but gets his order been triggered at a higher price more than what he or she planned to get meaning there is more profit and also when he or she wishes to buy up an asset at a particular value but sees his or her order triggered at a lower price value meaning that he buys lower and gets more, we see a positive slippage cause it favors the trader too.

EXAMPLE:

Mike wishes to sell off his sol token at 100$ since he has been holding for a long tie and now wants to take profit and now places an order and he now sees his order triggered at 104$ due to the volatile nature of the market and we see Mike get additional 4$ and this is an example of a positive slippage and also the same mike now wishes to invest this profit in doge and doge price was at 0.31$ and he places his order but he sees himself buying sat 0.29$ which means he bought lower and we see that at 0.31$ he gets 322.58 doge tokens but at 0.29$ he gets 344.82 tokens which means more tokens right so this is also positive slippage

NEGATIVE SLIPPAGE

This is the opposite of positive slippage cause here, the trader loses instead of gains. We see the change in price resulting in the trader getting his sell orders triggered at a lower price and his buy order triggered at a higher price. Here he wishes to sell off but his order is triggered lower while when he wishes to buy at a particular price he sees his order triggered higher meaning he is buying the asset at a higher value than intended giving him less amount of the token than he intended to buy

EXAMPLE:

Let's say mike wanted to sell his sol at 100$ but instead of the order been triggered at this price level or above, he sees is sell order been triggered at 96$ giving him a 4$ loss and after this loss, he goes to buy doge at 0.31$ but his buy order gets triggered at 0.34$ giving him a lesser amount of doge and in these two situations, the change in price didn't favor him giving a negative slippage

CONCLUSION

Learning about this spread actually helped me understand how a liquid market is classified and to understand the principle of bid and ask price which refers to how much a buyer is willing to pay and how much a seller is willing to sell at respectively. Thanks for this wonderful lecture @awesononso.