If you look at the order book above, you can see that the highest bid ($22,346) and lowest ask ($22,347) are not the same. Rather, there is a gap of one dollar. This gap is called the bid-ask spread. To put it in trading terms, the bid-ask spread is the gap between the highest bid and lowest ask in the order book. Put another way, it is the difference between the minimum price at which someone is willing to sell an asset and the maximum price someone is willing to buy that asset.

In most crypto exchanges, the bid-ask spread comes down to supply and demand dynamics in the order book, and the spread is generally quite tight. In these exchanges, the bid-ask spread might still expand from time to time, especially when the market behaves erratically or uncertainty is high – and liquidity dries up as a result.

With high-volume markets, the bid-ask spread is generally smaller, whereas lower liquidity markets have a bigger spread. This comes down to the lack of competition between buyers and sellers: the more the participants, the tighter the spreads is.

There are numerous resources available that monitor the average spread per exchange or even trading pair, but you can also calculate the spread yourself. Simply subtract the highest bid price from the lowest ask price. For example, if the highest bid on Ethereum is $1,570 and the lowest ask is $1,570.50, the spread is 50 cents.

Why Does the Bid-Ask Spread Matter for Crypto Trading?

The bid-ask spread can have a big impact on your trading, especially over longer periods of time. These small differences between buying and selling prices reduce your profit potential, as you’re buying at higher prices and selling at lower prices than you ideally would. Every transaction eats a tiny portion of your profits, which, over time, amounts to a sizable amount of money. Let’s look at an example.

Imagine you are trading an imaginary coin "ABC," where the fair market price is $0.35, and the spread is $0.02. In this situation, you buy ABC at the lowest ask price of $0.36. At this point in time, your best available option to sell ABC is $0.34 (highest bid price). In other words, the price will have to move up two whole cents, or approximately 5% just so you can get out at break even.

Especially when trading with a high frequency, bid-ask spread can really affectyour profitability.