Investment instruments such as stocks and crypto assets operate based on the fundamental principle of supply and demand. Transactions involving these instruments highlight the concept that sellers aim to sell their assets at the highest available market price, while buyers strive to acquire them at the lowest possible price. This dynamic tension between buyers and sellers generates a pricing disparity known as the “spread.” This article will discuss about the concept of spread, and why it is important for crypto investors and traders to understand it. Read the full article below.
Spread is the difference or gap between the buying price (bid) and the selling price (ask). This difference occurs in transactions between sellers and buyers on the exchange. For example, if you want to buy one bitcoin (BTC) for $30,000, but the seller sets the bid price at $32,000, there is a spread of $2,000.
Additionally, the spread can also be calculated as a percentage of an asset using the following formula $1,000 spread / $32,000 x 100 = 6.25%. In the crypto industry, there are three types of spreads, namely the inter-exchange spread, the intra-exchange spread and the calendar spread.
The bid-ask spread represents the disparity between the ask price (selling/offering) and the bid price (buying/buying) on an exchange. When buyers and sellers come to an agreement regarding their respective offered prices, a trade is executed. Spreads are commonly utilized in arbitrage trading strategies.
💡 Arbitrage is a trading strategy that aims to capitalize on price inconsistencies between two distinct markets. The entity engaging in arbitrage is referred to as an arbitrageur.
The bid-ask spread, primarily employed in arbitrage trading, encompasses the following forms:
Several factors impact spreads within the crypto market:
Other factors that can influence the spread include global macroeconomic conditions, geopolitical events, and news regarding regulations affecting crypto.
Spread trading provides arbitrage opportunities for investors and traders. This price difference can be exploited by buying assets at a lower price on one exchange and selling them at a higher differential price on another exchange. Arbitrage trading has been used by investors or traders who know how to take advantage of price differences.
In addition, understanding the spread can be beneficial to investors as it can be used to measure liquidity, identify market volatility, calculate costs incurred and compare asset values.
As a trader or investor, an understanding of the spread can offer its own advantages in trading and investing, especially as the spread can affect potential profitability, with a smaller spread allowing for quicker profits. Conversely, a larger spread requires a significant price movement to generate profits.
In addition, strategies that traders can use to minimize the spread include trading in high volumes, choosing liquid markets, and trading during busy hours. By effectively implementing these strategies, traders have the potential to increase their trading profits.
In conclusion, crypto spread is more than just a trading term, but refers to a concept that can bring success to crypto trading activities. By understanding the spread and knowing how to calculate it, one can certainly improve trading decisions and potentially achieve maximum profits.
Read more: 4 Crypto Trading Techniques You Need to Know
For those of you interested in trading or investing in crypto assets such as BTC and ETH, you can use the PINTU application. There’s no need to worry because the PINTU application is officially registered and supervised by the Commodity Futures Trading Regulatory Agency (Bappebti). All crypto assets available in the PINTU application have undergone a rigorous assessment process, prioritizing cautionary principles.
Aside from buying and trading crypto assets, you can expand your knowledge about cryptocurrencies through various Pintu Academy articles. Updated weekly, all Pintu Academy articles are made for knowledge and educational purposes, not as financial advice.