This article is an in-depth look at cryptocurrency trading broker spreads. Head on over to our guide on broker fees here!
What is the Spread?
Spreads are a trade cost you take on whenever you enter a trade. It is the difference between the “ask price” and the “bid price” – if you are unsure what these are, don’t worry, the next section looks at them in detail.
The spread can also be either fixed or variable. Currently, the crypto market largely uses the variable spread which we also take a look at later on.
How Does the Spread Work?
If brokers are using the spread as their trade fee, there are three different “prices” you will see on your trading platform.
Firstly, you have the market price. This is simply the current value of a cryptocurrency in another currency, most commonly USD, which is the value you see when looking at your chart.
Secondly, you have the ask price – this is the price at which you can go long on a cryptocurrency (BUY).
Lastly, the bid price is the price at which you can go short at (SELL).
The spread is the difference between the ask price and the bid price.
Let’s take the values in the image above. Do you know what the spread is?
Since the spread is the difference between the ask and the bid, we get a calculation of 3509 – 3,479 = 30. Simple and easy to understand, which is why spreads are extremely common.
You will take on the cost of the spread whenever you enter a trade. Therefore, in order to make a profit you need to cover the cost of the spread.
It should be noted that some brokers may choose to show the number of the spread in two different ways: points or pips. There is no industry standard just yet, but most brokers are using points.
The difference between a pip and a point is simple.
A pip is calculated from the right side of the decimal point. This is either from the second unit to the right, or the fourth, depending on the value of a crypto. This sounds more confusing than it actually is, so check out the example below.
The value on the far right is the spread in pip value, so the spread for BTC/USD in pips is 3000.
On the other hand, a point is calculated from the first unit on the left side of a decimal.
You can see the spread here for BTCUSD is 40 which is calculated from the left of the decimal. (It is 40 because this broker charges a higher spread!)
These spreads are simply being displayed in different ways.
So if you come across vastly different values when looking at multiple brokers, don’t be alarmed!
Almost all brokers that use a spread will calculate the spread amount as a percentage of the current market value. You can check your broker to see exactly what percentage they use.
A variable spread is primarily used in cryptocurrency trading; this means that the spread can vary depending on volatility.
A lot of brokers determine the spread as a % of the current value of a crypto. Therefore, the spread will increase alongside the increase in a crypto’s value.
Some brokers simply supply you with the spread that they offer which is chosen by them. They will keep to this spread unless the market becomes volatile.
A variable spread will increase during volatile market conditions which means you need to always look at what the spread is before you enter a trade. However, in quieter market conditions variable spreads will remain low.
These two factors are the primary cost and benefit, respectively, of using variable spreads.
You will see a range of different spreads on offer because there is yet to be an industry standard on calculating the spread. This is normal for a new market – there are still developments to be made in the cryptocurrency trading space.
However, you will also see a general trend of spreads decreasing over time. That’s because of the trading volume increasing.
Brokers can decrease the spread if the trading volume increases and it is in their interest to do so.
Lower trading costs will attract more traders which will make that broker more competitive, attracting more trades to their platform.
Who Uses it?
Spread trading is currently used predominantly by brokers that have come from other financial markets, such as forex and futures. This includes, but is not limited to:
These brokers are regulated and established, making them undoubtedly the safest ways to trade cryptocurrencies. Spread trading in general is also extremely popular.