What is Bid-Ask Spread?

The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept (the ask, or offer). This spread is a fundamental concept in all financial markets, including cryptocurrency trading, where it directly impacts the cost and efficiency of buying and selling digital assets.

In crypto markets, just like in traditional markets, the bid-ask spread serves as a measure of liquidity, market efficiency, and trading cost. A tight spread typically signals a healthy and liquid market, while a wide spread may indicate low trading activity or volatility.

This article explores how the bid-ask spread works, what factors influence it, why it matters to crypto traders, and how it functions in different trading environments including decentralised exchanges (DEXs).

Understanding the Bid and Ask

To fully grasp the bid-ask spread, it’s essential to understand the components:

• Bid Price: The maximum price that a buyer is willing to pay for a particular asset.
• Ask Price: The minimum price that a seller is willing to accept for that asset.

The spread is calculated as:

Bid-Ask Spread = Ask Price – Bid Price

For example, if the highest bid for Bitcoin is $28,950 and the lowest ask is $29,000, the bid-ask spread is $50.

The spread can also be expressed as a percentage:

Spread (%) = (Ask – Bid) / Ask × 100

In this case:
($29,000 – $28,950) / $29,000 × 100 = 0.17%

This small percentage might seem insignificant, but it directly affects trading costs — especially for high-frequency or large-volume traders.

Why the Bid-Ask Spread Matters

The bid-ask spread is more than just a price difference. It reflects the real-time market dynamics, and understanding it is crucial for several reasons:

1. Trading Cost: The spread represents an immediate cost to any trade. A buyer pays the ask price, and a seller receives the bid price. The difference is a hidden fee embedded into every market order.
2. Liquidity Indicator: A narrow spread usually means there’s strong buying and selling interest, making it easier to execute trades close to market price. A wide spread suggests a lack of counterparties or a thin order book.
3. Market Volatility: During volatile conditions, spreads tend to widen as traders become more cautious and risk premiums increase.
4. Slippage Risk: Larger spreads increase the risk that a market order will fill at an unfavourable price, especially in markets with low depth.
5. Arbitrage Opportunities: Traders often monitor spreads across exchanges to find and exploit price differences in real time.

Bid-Ask Spread in Crypto Markets

In cryptocurrency markets, bid-ask spreads can vary dramatically between coins, trading pairs, exchanges, and market conditions. Major cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) on top-tier exchanges tend to have very tight spreads — often less than 0.05% — due to high trading volumes and liquidity.

However, altcoins with low market caps or tokens listed on smaller exchanges can show spreads of several percentage points, making them expensive to trade efficiently.

Factors that influence the spread in crypto include:

• Liquidity and Trading Volume: High-volume pairs have tighter spreads.
• Exchange Type: Centralised exchanges often have tighter spreads than decentralised ones due to deeper order books and market makers.
• Token Volatility: More volatile assets typically have wider spreads.
• Time of Day: Spreads may widen during off-peak hours with less market activity.
• Market Sentiment: Uncertainty or fear can reduce participation and increase spreads.

Bid-Ask Spread in Centralised vs Decentralised Exchanges

Centralised Exchanges (CEXs)

On CEXs such as Binance, Coinbase, or Kraken, the spread is clearly visible in the order book. Buyers and sellers submit limit orders, and the spread narrows or widens depending on the balance of supply and demand.

Market makers — either institutional or algorithmic — often work to keep spreads tight to earn profits on volume and improve exchange efficiency.

Decentralised Exchanges (DEXs)

In most DEXs, especially those using automated market maker (AMM) models like Uniswap or SushiSwap, the bid-ask spread is not directly visible in the form of an order book. Instead, it is implicit in the price impact and slippage from trades against liquidity pools.

The effective spread on a DEX is determined by:

• The size of the trade relative to the pool
• The liquidity available in the pool
• The pricing curve used by the AMM (e.g., constant product)

As a result, users may encounter wider spreads or slippage on DEXs, especially for low-liquidity token pairs or large trades.

Strategies to Manage the Bid-Ask Spread

Understanding how to minimise the impact of the spread is key for effective trading. Here are some approaches:

1. Use Limit Orders: Instead of buying or selling at the market price, place a limit order at a more favourable price point. This avoids crossing the spread entirely.
2. Trade Highly Liquid Pairs: Focus on trading major assets with deep order books and tight spreads.
3. Check Multiple Exchanges: Compare prices across exchanges to find the best spread and avoid unnecessary trading costs.
4. Use Aggregators: Tools like 1inch or Matcha route your trade through multiple DEXs to find the optimal price with minimal spread and slippage.
5. Monitor Market Conditions: Avoid trading during periods of high volatility, low volume, or news-driven panic, when spreads are likely to widen.

Real-World Example

Suppose you want to buy 1 ETH on two different exchanges:

• On Exchange A:
  • Bid: $1,890
  • Ask: $1,892
  • Spread: $2 (0.11%)
• On Exchange B:
  • Bid: $1,880
  • Ask: $1,900
  • Spread: $20 (1.05%)

Buying on Exchange A costs you less immediately, not just because of the better price, but also because of the tighter spread, which means less slippage and better efficiency.

Conclusion

The bid-ask spread is a vital concept for understanding how markets operate, including in the world of cryptocurrencies. It reflects both the cost of trading and the health of the market, influencing everything from profitability to strategy. In crypto trading — whether on centralised exchanges or decentralised protocols — monitoring the bid-ask spread is essential for managing slippage, reducing fees, and improving execution quality.

As the crypto ecosystem continues to mature and liquidity deepens, spreads in many markets are becoming more competitive. However, for less liquid assets and emerging platforms, being aware of spread dynamics remains critical to informed and cost-effective trading.