The volatility of the cryptocurrency market provides many opportunities to earn money. However, strong fluctuations in quotes also carry some risks for traders. Such a phenomenon as slippage can cause significant losses during trading.
We explain why slippage occurs and how you can protect yourself from the negative consequences of this phenomenon.
What is slippage?
Slippage is a term that refers to the difference between the expected and actual order execution prices.
This phenomenon occurs as a result of high volatility or insufficient liquidity. A trader can earn money on slippage, but more often it leads to the order being executed at a price that is unfavorable for him.
Slippage is not limited to cryptocurrency traders, as it is a phenomenon that affects all markets. However, it is most often observed in low-liquidity trading pairs, as well as on smaller platforms or decentralized exchanges (DEX).
Why does slippage occur?
Slippage occurs due to the following reasons:
high volatility;
insufficient liquidity;
network congestion;
volume orders;
technical problems.
Since digital asset prices can change rapidly over a short period of time, the order execution price during high volatility may differ significantly from the planned transaction.
Slippage can also be caused by a lack of liquidity or the creation of a large order. In this case, only a certain part of the transaction can be carried out on favorable terms for the user.
For example, in January 2024, an investor lost $5.7 million while buying the Dogwifhat meme token (WIF). The user initiated three transactions, which cost him $8.8 million. However, due to the placement of a large order, the WIF quotes jumped from $0.15 to $3. Due to slippage, the unknown trader lost 60% of the investment.
In addition, slippage can be caused by technical problems on the platform where the order is placed. For example, a delay in data exchange.
Slippage is most often encountered by users of decentralized platforms. Since DEXs operate on smart contracts and have no central authority, the trading process depends on liquidity pools. This approach increases the risk of slippage.
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