Bid-Ask Spread
What Is Bid-Ask Spread?
The bid-ask spread is the gap between the lowest
asking price (the lowest price a seller is willing to accept) and the highest
bid price (the highest price a buyer is willing to pay) for an asset. It is one of the simplest ways to gauge the supply and demand of a particular market.
A narrow spread suggests buyers and sellers are closely aligned on price, while a wider spread points to a larger disagreement between the two sides. The spread can be expressed as an absolute value or as a percentage of the asset price.
How the Bid-Ask Spread Works
The bid-ask spread may form in two main ways. First, it can be set by a broker or trading intermediary as a way to monetize their service. Some brokers and trading platforms offer commission-free services and instead earn from the spread, buying at a lower price from sellers and selling at a higher price to buyers. Second, the spread can emerge naturally from the difference between the
limit orders that traders place on an open market.
With cryptocurrencies, most trading activity occurs on
cryptocurrency exchanges, where buy and sell orders are placed directly by users into the
order book. In this case, the exchange does not typically earn from the spread itself but from trading fees. A trader who places a
market order effectively "crosses the spread," buying at the lowest available ask or selling at the highest available bid.
As a simple example, if the highest bid for a token is 100 USDT and the lowest ask is 101 USDT, the bid-ask spread is 1 USDT, or roughly 1% of the price. A buyer using a market order would pay 101 USDT, while a seller using a market order would receive 100 USDT.
What the Spread Says About Liquidity
The size of the bid-ask spread is closely tied to
liquidity. High-volume markets tend to have narrower spreads because there is more competition among buyers and sellers, and orders are tightly clustered around the current price. Markets with low trading volume often show wider spreads, as fewer participants leave larger gaps between orders.
For traders, a wider spread can increase the cost of entering and exiting a position, and it is often associated with higher
slippage on larger orders. Monitoring the spread can therefore help traders assess how efficiently they may be able to trade an asset and what conditions to expect when placing an order.