In the cryptocurrency market, the spread refers to the difference between:
- The highest price a buyer is willing to pay for a coin (the bid price).
- The lowest price a seller is willing to accept for a coin (the ask price).
This difference arises from supply and demand in the market.
How does the spread work?
- Large spread: For less popular coins with lower trading activity, the spread can be larger. This means the difference between buying and selling is significant.
- Small spread: For popular coins with high demand and supply, the spread is often smaller because buyers and sellers are closer in their price expectations.
Why is the spread important?
The spread provides an indication of the liquidity and trading activity of a coin:
- A smaller spread indicates an active market with high trading volume.
- A larger spread may mean it is harder to execute a transaction at a favorable price.
For traders and investors, understanding the spread is crucial to grasp the indirect costs associated with a transaction. The larger the spread, the more you have to bridge as a buyer or seller.
In other words, the spread shows how far apart the buying and selling prices are in the market.