Not understanding the concept of slippage cost
this guy $400,000. That’s a really expensive way to learn that lesson, so I’m offering up a different way.
In order to understand slippage, you need to understand the difference between limit and market orders as a foundation. A “limit” or “maker” order is essentially advertising that a trader is willing to transact at that price, and is waiting for a “taker” or ”market” order to take them up on it. A market order will fill immediately at the best available price.
The way a market order executes the “best available price” is what creates slippage. If there aren’t enough limit orders advertising that they’re willing to transact at the best possible price, a market order will then automatically fill as much as possible at the best price, and then continue filling the second best price, the third, and so on. I’m a numbers guy so I’ll provide an example of how that works.
Imagine that Coin A is currently trading at 100 satoshis. You have 1,000,000 coins, worth 1 BTC. There are limit buy orders for 250,000 coins at each 100 sats, 99 sats, 98 sats, and 97 sats. If you market sell your 1,000,00 coins, your order will fill each of those four limit orders for a total of 0.985. The average sell price for those coins is 1.5% lower than the highest original limit buy order at 100 sats. It can be said then that your slippage was 1.5%.
If in that same scenario you decide to place a limit sell at 100 sats, your sell order would immediately fill the 250,000 coin limit buy order at 100 sats. The remaining 750,000 coins would be listed as for sale at that price, waiting for another trader to take you up on that offer and buy your coins.
Relying on another trader to fill your order is a risk and may take some time, which is why some traders prefer to absorb the cost of slippage instead. This is especially true in highly volatile markets where price can turn on a dime.
In the case of
the guy who lost $400,000 to slippage, he got a taste of what can happen at the extremes. In this case, he made such a large market buy that the only sell orders to take were at absurd and unrealistic prices. It's unfortunate that they made such a costly mistake, but hopefully other traders can learn from his poor example.
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