Spread Explanation: How to Reduce Costs in Crypto Trading

Cryptocurrency trading involves many hidden costs that can significantly reduce your profits, beyond just price movements. The main source of these costs is the spread— the economic difference that arises between the buyer and seller in the order book. The deeper your understanding of how this mechanism works, the more effective your trading strategy will become.

Spread Explanation — Market Reality

The order book structure forms the foundation of financial markets. When buying or selling cryptocurrencies, you’ll notice different prices for buying and selling. This range is what we call the spread—the difference between the highest bid (green) and the lowest ask (red).

Market liquidity directly affects the size of the spread. Highly liquid assets like Bitcoin or Ethereum typically have very narrow spreads—often just a few basis points. Conversely, trading smaller altcoins usually results in wider spreads. This also means your unprofitable trades can eat into your potential gains.

Market Maker and Liquidity Provider

On traditional financial markets, a market maker operates on a model where they buy and sell a specific financial instrument simultaneously, earning profit from the spread. For example, if a market maker buys an asset at $100 and sells it at $101, their arbitrage profit is $1 per unit.

In the crypto space, where decentralization dominates, various types of liquidity providers emerge. On automated market maker (AMM) platforms like PancakeSwap and Uniswap, liquidity pools perform this function. Here, the spread is determined by a pricing algorithm that is less directly tied to market demand.

During high-volume trading, the impact of the spread becomes more pronounced. Selling just ten units of BNB at $800 each might not significantly affect the spread, but selling a thousand units can cause price slippage at each level, making the spread appear wider and more costly.

Percentage Spread — What It Means

Absolute price differences are only part of the story. To compare spreads between different assets, you need to consider the relative value— the percentage spread. The simplest formula is:

(Ask Price - Bid Price) / Ask Price × 100 = Spread Percentage

For example, with TRUMP coin, if the bid is $9.44 and the ask is $9.43, the absolute spread is $0.01, which is about 0.106%. For Bitcoin, with the same $1 spread at around $50,000, the percentage is only 0.000844%—a quarter of my example.

This mathematical difference explains why more liquid and popular assets tend to have narrower spreads. The more frequently an asset is traded, the tighter its spread.

Price Slippage — The Hidden Enemy

Price slippage is another critical phenomenon related to spreads. It occurs when a large market order is executed at a significantly different price than expected. For example, placing a market order to buy many assets at $100 might not be fully filled at that price if the order book lacks sufficient depth, causing the average purchase price to rise above $100.

This is especially common in low-liquidity markets or during periods of low activity. For smaller altcoins, slippage can sometimes exceed 10%.

Positive Slippage — A Rare Win

While slippage is usually a cost, sometimes it works in your favor. Positive slippage occurs when, after placing a buy order, the price drops, or after a sell order, the price rises. This means your order was executed at a better price than expected, which is a fortunate outcome.

Controlling Price Slippage — Practical Strategies

Many DEX platforms include features to protect against slippage. You can set a maximum acceptable slippage, such as 1% or 5%. If the execution would exceed this limit, the order is automatically canceled.

However, setting very low slippage may prevent your order from filling at all, while setting too high exposes you to significant price impact and front-running by bots or traders who will try to execute ahead of you for profit.

Practical Tools to Reduce Spread Costs

Break Large Orders into Smaller Parts

Instead of placing one large order, split it into several smaller orders. Monitoring the order book helps determine the size that can be filled easily at current liquidity levels.

Use Limit Orders Instead of Market Orders

Limit orders execute only at your specified price or better. While they may take longer to fill, they eliminate the risk of unexpected slippage.

Consider Transaction Fees

On DEXs, blockchain network congestion directly affects transaction fees (gas). Higher fees can eat into your profits, so plan your trades during less busy times.

Avoid Low-Liquidity Assets

Assets with small pools or low trading volume tend to have wider spreads and more price impact. Trading on more liquid pairs is generally safer and more cost-effective.

Conclusion

Spread explanation and slippage are not just theoretical concepts—they are real costs that traders face daily. While their impact may be minimal for small trades, large-volume trading can turn these hidden costs into significant expenses. Understanding how spreads work is essential for transparent market participation and successful trading.