It is a common misconception that once the market price of a digital asset like a cryptocurrency goes up, you can (easily) sell your assets and make a profit. However, this is not always the case, especially in peer-to-peer trading. To make trading profitable, you need to consider the asset’s market spread.
Whenever you make an instant trade through a crypto exchange, the exchange will match you to the highest bid (the price a buyer is willing to pay for an amount of crypto) or the lowest ask (the price a seller wants in return for the same amount of crypto). These prices fluctuate constantly.
The gap between the highest bid and the lowest ask is the asset’s market spread. It is also called the bid-ask spread.
You can calculate the market spread of an asset using this formula:
Lowest Ask Price (38,694.0) - Highest Bid Price (38,693.9) = Market Spread (0.1)
In this example, the low market spread of 0.1 shows that there is only a small gap between the average price crypto is selling for and the average price buyers are willing to pay.
If you buy an asset with a high market spread and want to sell it immediately afterward, the highest offer for it will be much lower than the price you bought it for. To profit from the trade, you might need to wait until either the current market price rises or the market spread becomes narrower.
In the example above, if you want to profit from trading BTC/USDT, you can buy at 38,694.0 (lowest ask price) if you think you can sell once the highest bid price becomes 38,694.1 (0.2 greater than 38,693.9) or more.
An asset with a narrow market spread usually has high liquidity, active buyers, and trading volume. The demand is high and buyers are willing to pay higher amounts for the asset. If you want to trade crypto in this scenario, you have a greater chance of selling your assets at a fair market price.
On the other hand, an asset with a wide market spread usually has low liquidity and few active buyers. This can be due to either a shortage in supply that incentivizes sellers to keep prices high or a lack of buyer interest that discourages buyers from making higher offers for your assets. In this situation, it is difficult to sell your cryptocurrency at the price you want. If you purchase an asset from an exchange and immediately try to sell it for a profit, the only offers available may be much lower than what you originally paid for the asset. This could result in financial loss if you push through with the sale.
Understanding the crypto market spread helps you to make more profitable trades and equips you to be a more successful crypto trader. Happy trading, Ka-Bit!
