Hidden Costs: Bid-Ask Spreads

Exchange fees are the most explicit costs associated with transacting trades, but less transparent (implicit) costs are often overlooked. Bid-ask spreads (the difference between the best bid/ask prices) are the most obvious among the hidden transaction costs, and should be an equally important consideration when trading cryptocurrencies. Assume a Bitcoin is being sold at an exchange for $300 (best ask), while buyers are willing to pay $290 per coin (best bid). In this case, the bid-ask spread is $10 or 3.33 percent. A buyer that acquires one Bitcoin for $300 will only be able to immediately sell it for $290 and therefore automatically suffers a $10 loss equal to the spread.

Bid-ask spreads are normally not this wide, but are often around 0.25 percent (of the ask price) which is still equal to the trade fees charged by most exchanges. The size of the spread is mainly determined by the liquidity at the exchange, hence it is also called a liquidity cost. The lower the liquidity, the wider the spread.