One of the often overlooked aspects of trading is the bid-ask spread. The bid-ask spread, which can also be referred to as spread, can affect your overall trading profit in the short and long run, and this is why you need to understand how it works, how it is generated from the bid and ask price, and how to get the most out of it.

What Are Bid Prices and Ask Prices in Crypto Trading?

First, we need to explain the bid price and ask price in trading. These are prices that every trader interacts with before executing any trade, and they determine the prices at which your crypto trade orders will execute. They are the best possible prices that buyers and sellers are willing to transact at. Therefore, they are the best prices you can get to buy or sell assets in the crypto market.

  • The bid price is the highest price investors are willing to pay for a crypto token; the highest price buyers offer for an asset.
  • The ask price is the lowest price investors accept for their sell orders when trying to sell an asset.

Let's explain better with the following example. If the ask price of ETHUSD at the time you want to trade is $1334.48, while the bid price is $1334.30, your buy order will be placed at $1334.48 and your sell order at $1334.30.

What Is the Bid-Ask Spread?

The bid-ask spread is the difference between the bid price and the ask price. Using the example above, it would be $1334.48-$1334.30, giving us 0.18 as the spread.

Traditional trading platforms usually include services that do not charge commissions but rather charge spreads on their platforms. They can do this because they are the market makers. Setting the difference between the ask and bid price helps them to make profits.

On the other hand, buyers and sellers determine the ask and bid prices in the crypto market. They place different orders in the order books, making the market set prices using supply and demand factors. Crypto exchanges do not profit from the difference between the bid and ask prices but rather charge their users trade commissions.

How to Analyze the Bid-Ask Spread

Calculating the market spread is important when considering the trade execution price versus the profit you want to generate from the trade. Spread size can greatly influence your trades, especially if you are a short-term trader. Those little price differences can affect your potential profit in the long run. Therefore, you must consider how much the market spread will affect your trading results.

a screenshot of binance btcusdt price chart

One of the ways you can ensure you're trading with the lowest spread possible is by trading in liquid markets. A crypto asset with many buyers and sellers tends to have tight spreads due to the close ask and bid prices. Suppose you have a spread of as low as $0.18 for ETH trades, for example. In that case, you only need a little market movement in your favor to make a profit, and most retail traders won't need to worry about spreads reducing their potential profit significantly.

Spreads May Not Matter at All Time

It is always easier to profit when trading assets with small spreads than with large spreads. However, large spreads may not matter if you intend to hold the trade for a long time. Using limit orders is a good idea for short-term traders who must execute trades in markets with large spreads.