The spread between the buying and selling price: its essence and significance

Looking at the order book, one can notice that the maximum purchase price is (22 346 dollars) and the minimum selling price is (22 347 dollars), which do not match. The difference between them is one dollar. This gap is called the spread between the buying and selling price. In trading terminology, the bid-ask spread represents the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to sell it for.

On most cryptocurrency exchanges, the spread is formed under the influence of the balance of supply and demand in the order book. Usually, it is quite narrow. However, during periods of market turbulence or high uncertainty, the spread may widen due to decreased liquidity.

The trading volume directly affects the size of the spread. In highly liquid markets with a large number of participants, the spread is usually smaller. In contrast, in markets with low activity, the spread is wider due to less competition between buyers and sellers.

Although there are specialized resources for tracking average spreads across exchanges and trading pairs, you can easily calculate the spread yourself. To do this, simply subtract the highest buying price from the lowest selling price. For example, if the highest buying price for Ethereum is $1570 and the lowest selling price is $1570.50, then the spread is 50 cents.

The Influence of Spread on Cryptocurrency Trading

The spread between the buying and selling price can significantly impact your trading results, especially in the long term. These small discrepancies between the buying and selling prices reduce potential profits, as you acquire assets at prices higher than ideal, and sell them at prices lower than desired. Each transaction eats away a small portion of your income, which over time can add up to significant amounts. Let's consider a specific example.

Imagine that you are trading a hypothetical coin "ABC" with a market value of $0.35 and a spread of $0.02. In this situation, you buy ABC at the minimum selling price - $0.36. Currently, the best selling option for ABC is $0.34 (maximum buying price). In other words, the price needs to increase by a full two cents, or about 5%, for you to break even.

Especially with active trading, the spread between the buying and selling price can have a significant impact on your profitability.