What is slippage in crypto and how can you limit it?

What is slippage?

Slippage is the difference between the price at which you want to buy or sell a cryptocurrency and the price at which your transaction is actually executed. This happens when the market price changes between the moment you place an order and the moment it is executed. Slippage occurs relatively often in the crypto market, because prices are often volatile and liquidity can vary greatly per trading platform and trading pair. That is why it is important for crypto investors to understand what slippage is, how it occurs, and what you can do to minimize it.

Example
Suppose you want to buy Ethereum and the price is $2,000. You place a market order to immediately buy 1 ETH for $2,000. Due to a sudden increase in demand, other available sell orders are quickly filled. When your order is executed, the best available price has already moved to $2,020, so your order is executed at that price. The slippage is the difference between the expected price and the final price, which is $20. Slippage is often expressed as a percentage rather than an absolute amount. In this case, the slippage is 1%.

Key takeaways

• Slippage is the difference between the expected price of a crypto transaction and the price at which it is ultimately executed.
• It mainly occurs due to volatility, low liquidity, the type of order used, and delays in execution.
• Slippage can be either negative or positive, depending on how the market price moves during order execution.
• Slippage is more common in crypto than in traditional markets due to continuous trading and lower liquidity for some tokens.
• Investors can limit slippage by using limit orders, choosing liquid markets, and carefully configuring settings such as slippage tolerance.

How does slippage occur?

Slippage occurs when the market price changes between the moment you place an order and the moment the transaction is actually executed. This can have several causes.

Volatility

Slippage can occur due to the volatile nature of the crypto market. Crypto prices can fluctuate significantly in a short period of time, for example due to news, large market orders, or sudden changes in supply and demand. If the price rises or falls sharply while your order is still being processed, it may be executed at a different price than expected.

Liquidity

Liquidity also plays an important role. Liquidity indicates how many buyers and sellers are active in a market. The higher the liquidity, the greater the chance that an order is executed close to the expected price. With smaller coins or tokens, liquidity can sometimes be lower, meaning fewer orders are available at the desired price level. As a result, an order may be executed at less favorable prices further down the order book.

Order type

The order type you use can also affect slippage. Market orders are executed immediately at the best available prices and are therefore more sensitive to slippage. Limit orders are only executed at a pre-set price or better. This helps you avoid negative slippage, although there is a chance the order will not be executed.

Execution delay

Finally, delays in transaction execution can also play a role. On decentralized platforms, transactions are processed on-chain. During times of network congestion, it can take longer for a transaction to be confirmed. During that time, the market price may change and slippage can occur.

Is slippage always negative?

No, slippage is not always negative. There are two forms of slippage.

With negative slippage, your transaction is executed at a worse price than expected. This means, for example, that you pay more when buying Bitcoin, or receive less when selling Bitcoin. This is the form that usually has a negative impact on returns and is what investors typically think of when discussing slippage.

With positive slippage, the opposite happens. The market price moves in your favor while your order is being executed, resulting in a better price than originally expected. While this occurs less frequently, it is certainly possible in a fast-moving market.

Whether you experience negative or positive slippage depends on how the price moves during the execution of your order.

Why does slippage occur more often in crypto?

Compared to traditional markets, slippage occurs more frequently in crypto. Crypto markets are open continuously, allowing price movements to occur at any time. In addition, many cryptocurrencies and tokens are relatively small and therefore less liquid than large stocks, for example. Technological factors such as blockchain processing and network congestion also play an important role in transaction execution and can cause slippage.

Is slippage different on centralized and decentralized exchanges?

Yes, the way slippage occurs and how you can influence it differs by platform type. On centralized exchanges, transactions are processed through order books, where buy and sell orders are matched with each other. Slippage mainly occurs when a market order is larger than the available volume at a single price level in the order book.

On decentralized exchanges (DEXs), this works differently. These platforms use liquidity pools and automated pricing mechanisms. Large trades or low liquidity in a pool can cause the price to shift during the trade. In addition, network delays can affect the final execution.

Many DEXs therefore offer a slippage tolerance setting. This allows users to set in advance how much price deviation they are willing to accept. If this limit is exceeded, the transaction will not go through. This protects against extreme negative slippage, but it can also cause transactions to fail, sometimes resulting in network fees.

How can you limit slippage?

Although it is difficult to avoid slippage entirely, there are ways to reduce its impact:

• Use limit orders so you have more control over the price at which you buy or sell crypto.
• Trade in liquid markets with sufficient volume, where prices are less likely to shift quickly.
• Pay attention to the timing of your transactions. During highly volatile moments, such as major news events or strong market moves, the likelihood of slippage is higher.
• On decentralized exchanges, set your slippage tolerance carefully and avoid unnecessarily high settings. Choose the lowest possible tolerance at which transactions are still executed reliably.

Final thoughts

Slippage is a common and unavoidable part of trading crypto, especially in a market that moves quickly and is open 24 hours a day. While slippage can sometimes work in an investor’s favor, in practice it more often has a negative impact on final transaction costs or returns. By understanding what causes slippage and how different trading platforms handle it, investors can better anticipate these price differences. With the right choices in order types, timing, and settings, the impact of slippage cannot be fully eliminated, but it can be managed effectively.