Bid-Ask Spread on Exchange and Why It Is Very Very Important
The Bid-Ask Spread
Bid-Ask spread is one of the main features in a lot of crypto exchanges order book. Before delving into what Bid-Ask spread is, it is first important to talk about what the bid and ask is so as to get a better understanding of what the bid-ask spread is. In crypto exchanges order book, the Bid is simply the buy order that contains the highest buy prices that each buyer are willing to buy in the cryptocurrency pair. The Ask is simply the sell order that contains the lowest sell prices that each seller is willing to sell in the cryptocurrency pair.
The Bid-Ask Spread is simply the difference in price between the ask price and the bid price in the order book. Simply put, Ask price - Bid price gives the spread. For instance, if the lowest Ask price of a particular cryptocurrency is $2, and the highest bid price is $1.5, the Bid-Ask Spread is $2 - $1.5 = 0.5. Therefore, the Bid-Ask Spread is $0.5.
Why the Bid-Ask Spread is important in a market
In trading any cryptocurrency asset pair, one of the main factors that traders pay attention to is the activities on the order book and the Bid-Ask Spread. This is very important because the Bid-Ask Spread help indicate the liquidity in the particular asset pair. In cryptocurrency trading, Liquidity simply means the number of buyers and sellers in the market and how easy it is for buyers and sellers to buy or sell any cryptocurrency in the market at a stable price when the Bid-Ask spread is small without any drastic change in the overall market price.
Also, the Bid-Ask Spread can also tell the popularity of a particular asset. A lot of new cryptocurrency asset might have large bid-ask spread because they not yet popular and don’t have enough buyers and sellers. This can be an opportunity for buyers to capitalize on inpatient sellers and buy assets with very good potential at a very low price and wait for the asset to gain popularity and have enough buyers and seller which causes the bid-ask spread to become very small.
Calculating the Bid-Ask spread
Like I explained above, the Bid-Ask Spread is simply the Ask price minus the Bid price.
for instance
The ask price = $5.20
The bid price = $5
The Bid-Ask Spread = ask price of $5.20 minus bid price of $5 = $0.2
Therefore, the Bid-Ask Spread is $0.2
Calculating the Bid-Ask spread in percentage
Percentage Spread = the Spread divided by the Ask Price multiplied by 100
Percentage Spread = (Spread/Ask Price) x 100
From the calculation of the spread above, the spread = $0.2
Using that in the formula,
Percentage Spread = spread of $0.20 divided by ask price of $5.20 = 0.0385 x 100
0.0385 x 100 = 3.85
Therefore, the percentage spread is 3.85
