What is Spread in Crypto? Explanation and Tips
Dear crypto trader, you want to start crypto trading and are delving into the terminology. A relevant item is the spread in crypto. Spreads lead to additional costs in crypto trading. Spreads are not the same as transaction costs, and they differ from broker to broker. In this article, we will explain what crypto spread means. We also provide tips on how to lower your spread in order to reduce costs and increase your net return.
On to sustainable (financial) success!
Table of Contents
What is spread in crypto investing? Explanation
The word ‘spread’ has different meanings for different levels of education. In finance, it simply means the difference between the two values or amounts. It may also refer to the difference between a bid and the requested amount of any financial instrument. An instrument can be a fiat currency, cryptocurrency, stock, bond, commodity, collateral or asset. In banks, reference is made to the difference between savings and finance rates.
The spread in crypto is the gap in the buy and sale prices of cryptocurrency. When you open a position in the crypto market, you will be given two values. If you intend to start a long position, you are trading at a greater price than the market price. If you intend to initiate a short position, you are trading at a reduced price which is slightly below market price.
Understanding the Anatomy of Spread
In (crypto) trading, generally, 'spread trading' terminology is used. Spread trading, while dealing with (crypto) currencies, is the gap between one (crypto) currency's short position and another currency's long position.
In easy words: the spread is the difference between the paid amount to one who issues the security and the value of money, in whatever form, paid by the trader for that security.
On the lending side, the spread is defined as the amount the borrower pays to the lender above the cost of the funds that the lender bears while keeping the people's money in reserves.
The asset spread (in crypto) depends on the number of factors like:
- The total number of outstanding coins/tokens
- The demand of the coins/tokens
- Trading volume of the coins/tokens
Fixed vs Variable Spreads
We will elaborate on the difference between fixed and variable spreads while discussing the forex CFDs. The same mechanism is applied while dealing with the Crypto CFDs.
When forex or crypto spreads fluctuate, the difference between the sale and purchase prices of long currency pairs is affected. Most buyers charge a variable spread of the EUR/USD pair from 1 to 4 pips. While under turbulent trading circumstances, this may grow to 8 or even 10 pips. The volatility spread is expanding in step with rising market capitalisation and is particularly low in times of market instability.
The fixed (crypto) spread, on the other hand, is predetermined and does not fluctuate with the market. Fixed spreads are frequently established at 2 or 3 pips in EUR / USD and are normally within the range of a volatile spread. When there is less market volatility, and the spread is less, traders pay a tiny charge. But traders may be certain that even under extreme market circumstances, the spread will not widen. Fixed spreads that are predictable allow traders to prepare ahead of time and avoid having to adjust to unpredictability, which drives up operational expenses during peak trading hours.
In crypto trading, you should consider both fixed and variable spreads for crypto. Below we will give tips about lower the spread in crypto.
4 Tips about spread in crypto investing
It is important to minimize the spread with crypto. The lower the spread, the higher your net returns. The good news is that this is easily done. Follow these 4 tips and you will have lower spread with crypto.
Tip 1. Find crypto brokers with the lowest spread
It is better to search for the best crypto brokers that always provide the lowest spreads on crypto trading. If the spreads are high, your profitability will be decreased and vice versa. In other words, spreads are the most prominent determinant of your overall trading profit. If a broker satisfies your set of trading priorities, keep in mind the range of spread the broker will charge. But sometimes, you can't only rely on the spread. For example, there are scams in crypto brokerages. The broker may attract you while offering the lowest ever spreads and when you play greedy in this scenario, you will deprive of the principal amount as well.
View and compare the best forex brokers as a reference. Most of them offer crypto as well.
Tip 2. Choose when to go for Variable Spreads
If you are a long term trader, variable spreads are the right fit for you. It is good for those who don't like to trade during news events. Those who prefer smooth market entry and exits can work for the variable spreads. During the high market volatility, the variable spreads are hard to calculate and often expanded to avoid market uncertainty. On the other hand, in normal conditions and during off-peak trading hours, the variable spreads remain lower, providing traders with the opportunity to trade and save as much cost as they can.
Tip 3. Choose when to go for Fixed Spreads
During peak hours or when the markets are volatile, it is hard to anticipate where the market will move. No doubt, the market can move strongly, either bull or bear. However, when you are dealing with the fixed spread broker, you have no concern with the market movement as you will still be paying a fixed spread on CFD Crypto trading. In other words, fixed spreads have no alternate in highly volatile markets.
As described, crypto spreads surge when there is volatility expected in the market or during the peak trading hours. More importantly, major news such as key interest rate decisions by the central bank, local business hours and crypto exchange. In addition to that, when important technical levels are violated, the market becomes volatile as the traders have no clue on the price direction. It can either move 100 pips in 5 minutes or move 900 pips in 20 minutes. So, if you want to undertake event-oriented trading, fixed spreads are the game for you.
Stop loss or limit orders may be mistakenly triggered by variable spreads. If the Bid and Ask difference widens and approaches the level of a stop or limit, this large gap may abruptly execute a conditional order. As a result, you'll have to revise your approach to account for this additional variable. Because the Bid and Ask are always synchronised, this is less likely to happen with fixed spreads. Because traders never have to guess what the spread will be, they can better plan their strategies and keep track of their funds with fixed spreads.
Tip 4. Cross-check spreads the broker has offered
Pertaining to the spreads, it is prudent to cross-check what you are paying to the broker in terms of spreads. Since there are many scams in the market, the broker may charge you more than they claim to charge. In that case, you must avoid relying on the broker. This can be true for smaller crypto brokers that are not being regulated.
Besides lowering costs with spreads, it is even more efficient to improve your trading skills and maximize your trading profits. Read our crypto trading tips for beginners to avoid big losses and improve your skills.