How the (bid-ask) buy and sell price affects your trading

Every trader on a cryptocurrency exchange faces a phenomenon that constantly “eats away” at their profits – the spread between the buy and sell prices. At first glance, it may seem that a small gap of a few cents or dollars doesn’t matter. However, if you trade actively, these microscopic losses accumulate and eventually turn into significant amounts. Let’s understand why this happens and how it affects your trading strategy.

What does the bid-ask spread mean?

If you open the order book on any exchange, you’ll notice an interesting fact: the highest price buyers are willing to pay (bid) and the lowest price sellers ask for (ask) never match. There is always a gap between these two values. This gap is called the bid-ask spread.

The essence is simple: when you buy, you pay the seller’s price (higher), and when you sell, you receive the buyer’s price (lower). For example, if the order book shows a maximum bid of $22,346 and a minimum ask of $22,347, the spread is just one dollar. But even such a small difference impacts the final outcome of your trades.

Calculating the spread is straightforward. Just subtract the maximum bid from the minimum ask. For Ethereum: if the highest bid is $1,570 and the lowest ask is $1,570.50, then the spread is 50 cents.

Why does liquidity determine the size of the bid-ask spread?

The size of the spread is not random – it directly depends on the demand and supply dynamics. On crypto exchanges with high trading volume, spreads are usually narrower, while on less liquid platforms, they widen.

This is simple to explain: the more participants in the market, the more intense the competition for the best conditions. When many buyers try to raise their bids and sellers lower their asking prices, the gap between them shrinks. Conversely, during times of market uncertainty or chaos, participants become more cautious, liquidity “dries up,” and the bid-ask spread widens to find a fair price.

On highly liquid markets, competition is so fierce that the spread can be less than a cent. On low-liquidity markets, the buy and sell prices can differ by several percent.

Practical example: how the spread affects your profit

To understand the real impact, let’s consider a specific example. Imagine you’re trading a hypothetical coin “ABC” with a fair market value of $0.35. However, the bid-ask spread is $0.02.

In this scenario, you are forced to buy ABC at the minimum selling price – $0.36. At the same time, the best available sell offer is at $0.34. In other words, the price needs to rise by a full two cents (about 5%) just for you to break even.

This effect becomes even more noticeable with frequent trading. If you make dozens of trades a day, each one “chips away” at your potential profit. These micro-transactions gradually turn into real losses, even if your trading logic is perfect.

Why is it important to know this for successful trading?

Understanding the bid-ask spread mechanism is not just theory. It influences your choice of exchange, trading timing, and position size. Experienced traders prefer platforms with maximum liquidity because spreads are minimal there. They also tend to trade during peak activity hours when more participants are in the market, and the buy and sell prices are as close as possible.

Therefore, controlling the bid-ask spread is one of the ways to optimize your trading strategy and protect your profits.