If you have had any experience in trading cryptocurrencies, shares or any other asset through a brokerage or stock exchange, you have most likely heard of price spread.
For those who want to deepen their knowledge of the market to manage investments more intelligently and obtain more profitable results, understanding the usability of the spread can have a very significant impact.
What is spread?
Simply put, the spread is nothing more than the difference between the highest price of buy orders and the lowest price of sell orders for a cryptocurrency at a given broker. This gap is formed due to the different expectations of buyers and sellers, with sellers always wanting to sell as high as possible and buyers always looking for the lowest possible purchase price.
That’s why, at any time, the price you can buy (indicating that someone is selling to you at that price) is always more than the price you can sell immediately (indicating that there is a buyer on the opposite side, willing to buy at that price).
What factors can impact the spread?
As explained above, the spread is the result between demands and offers. If the spread is too small, the bid and ask prices are very close, indicating a consensus between buyers and sellers about how much the asset is worth. If the spread is too large, expectations about the market between the two sides can be quite different.
The spread can be impacted by the following factors:
- Liquidity: the more liquidity an asset has, the smaller the spread will be. There is a greater opportunity to have orders executed.
- Traded volume: the greater the traded volume of a cryptocurrency, the smaller the spread will be.
- Market volatility: normally the greater the volatility the asset receives, the greater the spread will be.