How does the Bid-Ask spread affect your profitability when trading cryptocurrencies

Every trader starting to work with cryptocurrencies faces the same unpleasant phenomenon: when buying an asset, you have to pay more than when selling it. It may seem like a minor difference, but over time, this difference accumulates into a substantial amount of losses. This is exactly what the spread between the bid and ask prices refers to.

What is a spread and where does it come from

In the order book of each cryptocurrency exchange, there is always an interesting paradox: the maximum price buyers are willing to pay never matches the minimum price sellers are willing to accept. There is a gap between these two levels. When we talk about the bid-ask spread, we mean this gap – the difference between the highest bid price and the lowest ask price.

Let’s consider a specific example: if the highest buy order on the exchange is $22,346 and the lowest sell order is $22,347, then the spread between them is one dollar.

What affects the size of the spread

The size of the spread directly depends on market activity. On platforms with high trading volume and a significant number of active traders, the spread is usually tight and narrow. This happens because competition among many buyers and sellers automatically narrows the gap between prices.

The opposite situation is observed in markets with low liquidity and volatility. Here, spreads widen because there are fewer participants, they are less active, and their offers are farther apart. The spread especially increases during periods of uncertainty and market fluctuations when participants become more cautious and leave larger gaps between their orders as a form of protection.

How to calculate the spread yourself

Calculating the spread is a simple process. You just need to subtract the highest buy price from the lowest sell price.

Let’s take Ethereum trading as an example. Suppose the best available buy order is $1570, and the best available sell order is $1570.50. In this case, the spread is 50 cents. There are specialized resources that track average spreads across different exchanges and trading pairs, but if desired, anyone can verify this information manually.

Why the bid-ask spread is critical to your profit

This is where the main danger for traders lies. Every time you open a position, you automatically lose money on the difference between the buy and sell prices. You buy at a higher price (ask price) and are forced to sell at a lower price (bid price). These micro-losses, which seem insignificant in each individual trade, gradually eat into your potential profit.

Let’s consider a practical example. Suppose you are trading a hypothetical coin ABC, with a fair price of $0.35 and a spread of $0.02. When entering, you are forced to buy at $0.36 (the lowest seller offer). To break even, you need the price to rise to $0.34 (the highest bid price). This means the price must increase by a full two cents – approximately five percent – just for you to reach the breakeven point.

For those who trade frequently, making many transactions, the effect of the bid-ask spread becomes even more destructive. Each additional transaction repeatedly takes the same share of capital, and over time, this leads to significant losses in overall profitability.