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Spread

Sometimes you may find that the Buy price and Sell price of any one particular asset is different. The difference is called ‘spread’.

What is spread in Crypto trading?​

The spread is the gap between buy/sell prices. It is a key indicator of market liquidity and the cost of entering or exiting a trade. A smaller spread typically means higher liquidity, meaning there are more buyers and sellers in the market, and transactions can occur quickly at competitive prices. On the other hand, a larger spread indicates lower liquidity, where fewer market participants may be available to transact at the current prices.

Why the spread exists?​

The spread in the cryptocurrency market exists due to several factors, primarily related to market dynamics and liquidity. Here are the main reasons why a spread exists:

  • Liquidity: In less liquid markets (where there are fewer buyers and sellers), the spread tends to be wider. In contrast, highly liquid markets (where there is a large volume of buyers and sellers) usually have a narrower spread. Cryptocurrencies can have varying levels of liquidity depending on the coin, the exchange, and the trading pair.
  • Market Makers and Takers: Market makers provide liquidity by placing buy and sell orders at various prices, while market takers accept these prices by executing trades. The market maker sets the bid and ask prices, and the spread compensates them for the risk they take by providing liquidity. Market makers often adjust the spread to ensure they remain profitable while managing risk.
  • Volatility: Cryptocurrencies are highly volatile, and prices can fluctuate rapidly. In highly volatile markets, the spread can widen because traders and market makers may adjust their prices to account for the increased risk of price swings. This helps protect them from potential losses if they need to quickly adjust their positions.

In summary, the spread is a natural result of the interplay between market liquidity, volatility, supply and demand, and the activities of market makers. It acts as a way for market makers to manage risk and is also a cost for traders who wish to execute immediate transactions.