Key takeaways

  • Crypto slippage happens when the price you expect for a trade differs from the actual price due to market fluctuations.
  • Factors like market volatility and liquidity are major causes of slippage, with centralized and decentralized exchanges handling slippage differently.
  • Positive and negative slippage can impact your trade, either saving or costing you money, depending on price movements.
  • Minimizing slippage involves strategies like using limit orders, choosing high-liquidity platforms and adjusting slippage tolerance settings.

In crypto trading, you’ve likely noticed that the price you expect to pay for a trade sometimes differs from the actual price when the order goes through. This is due to crypto slippage — the price fluctuation that occurs between placing and executing a trade.

Slippage is common in volatile markets or with large orders. But there are ways to minimize it. Plus, you can better navigate the ups and downs and avoid unwanted surprises in your trades by understanding slippage tolerance and using strategies like crypto market orders or slippage protection.

This article explains how crypto slippage occurs during trades and discusses strategies to minimize the impact of price fluctuations on your cryptocurrency trading. 

Slippage in crypto, explained

When the price at which your cryptocurrency trade is executed differs from what you had anticipated, this is known as slippage. In simple terms, imagine you are at a store, and you see an item priced at $10, but when you go to the checkout, it costs $12. 

In cryptocurrency trading, there are a number of reasons why this discrepancy, or slippage, occurs.

What causes slippage in cryptocurrency trading?

Market volatility and low liquidity are often the primary causes of slippage in crypto trading. For example, you wish to purchase 1 Bitcoin (BTC) for $60,000. But because the cryptocurrency market is so volatile, the price could fluctuate while your order is being filled. As a result, the price at which you purchase Bitcoin may differ significantly from what you had expected.

Similarly, if the market is not highly liquid, there may not be enough Bitcoin available at your preferred price, which could result in further slippage.

The amount of price variation you’re ready to accept during trade, or your slippage tolerance, also matters a lot. Your trade might not close if you set a low tolerance, and you might be exposed to a larger slippage if you set a high tolerance.

Understanding positive and negative slippage

But not all slippage is bad — there are two types:

  • Positive slippage: Let’s say you plan to buy Bitcoin at $60,000, but the price drops unexpectedly and you wind up buying it at $59,800. Positive slippage has just helped you save $200.
  • Negative slippage: On the other hand, negative slippage would occur if you intended to purchase BTC at $60,000 but ultimately paid $60,200 because of price variation. In this case, the slippage cost you more than expected.

Did you know? During the 2020 DeFi boom, slippage on Ethereum-based decentralized exchanges like Uniswap increased by over 200% due to network congestion and soaring gas fees.

How to calculate crypto slippage

Continuing the above example, let’s say that, by the time your order is executed, you buy BTC at $60,200 (the executed price) instead of $60,000 (the expected price) due to price changes.

Therefore, slippage is calculated using the below formula:

Example: How to calculate slippage (in $)

You can also calculate the percentage to understand how significant the slippage is relative to the intended price.

Example: How to calculate slippage percentage

This means that because of market movement, you paid $200 more than you originally intended, a 0.333% increase from the expected price.

Typically, the slippage amount is managed by centralized exchanges (CEXs) and decentralized exchanges (DEXs) — but who earns it?

Slippage on decentralized vs. centralized exchanges

Generally, the slippage aids in compensating those who supply the liquidity required for smooth trade. But it works differently on DEXs and CEXs. Let’s understand how:

  • Decentralized exchanges: Slippage in DEXs typically benefits liquidity providers. These are the individuals who provide the assets to the exchange’s liquidity pools, enabling trades. The additional amount you pay in the event of slippage compensates these liquidity providers, making up for the opportunity cost and risk associated with keeping their assets locked in the pool. 
  • Centralized exchanges: On centralized platforms, the exchange absorbs the slippage amount, and it isn’t passed on to any specific party. However, a spread or other fee included in the exchange’s fee structure may account for some of this slippage. 

But what factors cause slippage on both CEXs and DEXs?

Factors causing slippage on CEXs

To answer the question of why the price you see when you place an order isn’t always the price you get, let’s look at some common factors that can cause slippage on centralized exchanges:

  • Market volatility: If the market is moving swiftly, the price of the asset may fluctuate between the moment you submit your order and the time it is executed. This is particularly true during times of extreme volatility.
  • Exchange fees: A spread or transaction fees charged by exchanges can lead to slippage. These costs are typically reflected in the price you pay.
  • Order size and liquidity: Large orders can impact market prices, potentially causing the price to move unfavorably as your order is filled due to insufficient liquidity at the current price. 

Factors causing slippage on DEXs

Slippage on decentralized exchanges works differently than CEXs. Here’s what you should know about the factors influencing slippage on DEXs:

  • Trading volume: A low trading volume may indicate a reduction in the number of transactions, which may lead to more significant price swings. In general, higher trade volume translates into less slippage and greater stability.
  • Block confirmation time: DEXs use the blockchain to process trades, which involves block confirmation times. Before your transaction is confirmed, the price may change if the network is busy or if block times are slow.
  • Liquidity for the token pair: If the liquidity for the token pair you’re trading is low, there might not be enough funds in the liquidity pool to execute your trade at the requested price, leading to a significant slippage.
  • Design of AMM: DEXs use automated market makers to calculate pricing based on the ratio of assets in a liquidity pool. The AMM’s specifications and design may impact slippage. For example, some AMMs have higher slippage for larger trades due to the way they balance the pool’s asset ratio.

Did you know? In DeFi, liquidity providers on DEXs earn fees from slippage, with some pools generating over $1 million daily from transaction fees. 

How to minimize slippage in cryptocurrency trading

Minimizing slippage is critical when trading crypto to protect your investments and ensure your trades execute as planned. Strategies that may help manage slippage and reduce crypto trading risks include:

  • Use limit orders: Have you heard about market orders vs. limit orders? When market orders are executed at the current market rate, slippage may occur if prices move quickly. Contrarily, limit orders allow you to indicate the price you are prepared to pay or receive. Ensuring that your trade only proceeds at the price you have selected, a limit order can help avoid slippage. 
  • Choose a trading platform wisely: A platform with low trading fees and high liquidity may help reduce the impact of price changes and can make your trades more predictable. Thus, choosing such a platform can make a big difference!
  • Adjust slippage tolerance settings: On cryptocurrency trading platforms, you may specify a slippage tolerance. This parameter allows you to adjust your tolerance for price fluctuation before a trade is executed. By carefully adjusting this tolerance, you can ensure that your purchases are processed and prevent unanticipated slippage.
  • Trade liquid cryptocurrencies: Ensure there is adequate liquidity in the cryptocurrency you are trading. More buyers and sellers translate into higher liquidity, which facilitates trade execution at or close to your intended price.
  • Consider trading fees: When planning your trades, don’t forget to account for trading fees. Selecting exchanges with competitive fee structures is crucial because high fees can worsen the effects of slippage.

How to choose the right slippage tolerance

Slippage tolerance decides how much price fluctuation you will tolerate before your trade goes through. But how do you decide on the right setting?

Well, the right slippage tolerance depends on your trading strategy and market conditions.

You might want to lower your tolerance (e.g., 0.5%) if you prefer to keep things tight and ensure the trade executes as near to the intended price as possible. This works well in more stable markets, but if prices move too much, it can prevent your order from being filled. 

In contrast, a larger tolerance may be required (e.g., 2%) to ensure your order is executed if you’re dealing with assets with limited liquidity or trading in a highly volatile market, be aware that you may have to pay more than you had anticipated.

Whether you prefer to wait for a better price or pay more than you expected depends on your risk appetite and trading goals.

Did you know? A study on DEXs found that Uniswap’s switch from a static 0.5% slippage tolerance to a dynamic rate based on market conditions significantly reduced traders’ losses by about 54.7%. This adjustment aimed to mitigate sandwich attacks while minimizing transaction failures, proving more effective for traders who used the default settings.

Practical tips to avoid slippage

Slippage can be frustrating. Right? 

Let’s understand how to avoid slippage on your crypto trades and improve your overall trading outcomes.

  • Avoid trading during big news events: When Elon Musk tweeted about Bitcoin at the beginning of 2021, do you recall the chaos? There was widespread slippage and sharp price swings. Avoid trading during significant announcements or news events to prevent this. Prices may increase before your trade is completed because cryptocurrency markets react fast.
  • Break up large trades: Trading a significant quantity of cryptocurrency at once, such as a big stash of Bitcoin, might impact the market and result in slippage. Try breaking up your trade into smaller parts instead. This is especially helpful in markets with less liquidity, when a single large order might cause a significant price shift.
  • Monitor network congestion: Have you ever attempted to trade during network congestion and found that your transaction takes a very long time? A high level of network congestion, especially on Ethereum, can cause slippage and delay transactions. It can also result in a spike in gas fees and slow down transactions, which could cause slippage. To avoid this, try trading during off-peak times or use layer-2 solutions like Arbitrum or Optimism, which are faster and less expensive.
  • Automate your trading with bots: You can automate trades and respond to the market more quickly than with manual trading by using a trading bot. When market conditions meet your requirements, bots can execute transactions rapidly, which lowers the likelihood of slippage. For example, in times of strong volatility, a bot can prevent delays that could result in slippage by placing and executing a limit order as soon as a price target is reached.
  • Say no to FOMO trading: Remember GameStop and Dogecoin frenzies? Fear of missing out (FOMO) caused many traders to jump in and pay far more than anticipated. Refrain from following every hype. FOMO trading frequently occurs in extremely volatile environments when slippage is almost certain. Remain true to your trading strategy and resist the need to rush things.

Even while slippage is sometimes unavoidable, you can greatly reduce its occurrence by comprehending its causes and implementing strategies, as discussed above. 

However, slippage remains a common challenge, which should be considered as part of the trading learning curve. By staying aware, you can reduce slippage and maintain greater control over your trade.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.