✔️ Information reviewed and updated in December 2023 by Eduardo López
Denominated as Spread to the difference between the purchase and sale price in financial assets, the Spread is one of the terms that you must know in cryptocurrencies. This because the very nature of these virtual currencies makes this something common and very marked.
Don't worry, you don't need to read a whole financial dictionary because that's what we're here for. Here we will tell you everything you need to know about the spread in cryptocurrencies and how it can influence your investments. In this way, you can make better decisions.
➡What is the Spread in cryptocurrencies?
As we already told you, the Spread is the difference between the purchase and sale price of a financial asset. The same applies to cryptocurrencies, since it is the difference between the price you bought it and the price you sold it.
The spread turns out to be very important, since this allows us to determine what the gains or losses were for your investment. Most brokers tend to calculate the spread automatically because within it, many charge commissions.
- Permanent: The fixed spread, as its name implies, is usually a spread determined or fixed by the same broker which only changes depending on the currency pair in which we operate, more does not depend on the variations of the market.
- Variables: On the other hand, we have the most common spread of all which is the variable. This changes according to market fluctuations so it is usually a sign of the volatility of cryptocurrencies. For many, this spread is one of the most important to understand, as it greatly influences the final result of our options.
➡The data that we can obtain
- Potential earnings: If the spread between the price at which you bought the coin and the price at which you will sell it turns out to be positive, then you will have a potential profit. For example, if the buy price was $ 1 and the sell price was $ 3, you would have a spread of $ 2.
- Losses: Another piece of information that the Spread can give you is to see if you have potential losses in your operation. How? Let's take the example above, but in reverse. If you bought it for $ 3, but it is now worth $ 1, then you will be losing $ 2.
- Market trends: The Spread can also reveal, in a certain way, the market trend, since it shows the variation in prices. This can give us an idea if the trend is going down, or, on the contrary, going up.
- Other data: Some experts use the spread as a piece of information to know if it is convenient to leverage and how to do it more effectively. It can also be used as a way to determine which trades are more profitable or what is the cost of a trade. In general, the difference between prices can help you draw a lot of conclusions.
➡PIPs in Spreads
Another term that you should know is PIP (Percentage in Point) or percentage point in Spanish. This concept is used to describe the variation between the purchase price and the sale price through the variation of percentage points.
And is that most operators give you the price in the form of numbers and decimals, for example, 1.568-1.562. In this case, the difference between pairs is 0.006 which is represented as 6 PIP. If you see that you have a number followed by the word PIP, now you will know what it means.
➡Operation in pairs
You should also know that the Spread and the PIP are only calculated in the pairs automatically, this because the operations are carried out under this mechanism. An example of a well-known pair is that of Bitcoin and Ethereum: BTC / ETH, although we also have pairs between virtual currencies and fiat money such as USD / BTC.
So it is likely that you will find the spread with their respective PIP in the main pairs of the brokers, although in general, it should be available in most. Each pair has its own difference so they will have their own Spread and PIP.
➡How can I calculate the spread?
Calculating this indicator is very simple, since you only have to do a simple mathematical operation. For example, if we have a pair with the following values: 1.23 / 1.20, we just have to do the subtraction: 1.23 - 1.20 give 0.03 Spread or 3 PIP.
In this way, all you have to do is subtract to determine the difference between the sale price and the purchase price. In case your broker does not give you this data, you can easily determine it by seeing in which values the pairs operate.
➡Why should I take it into account?
There are many reasons why experts recommend considering the spread when trading cryptocurrencies. Next, we will tell you what are the main reasons why you should have this indicator in your mind.
- Calculate the results of the operation: First of all, the spread allows you to accurately estimate the results of your trade. That is, with this indicator you can know if it is convenient for you to sell or if it is better to wait for the sale price to improve to obtain a profit or recover the investment.
- It helps you to know how the market is: The same sale and purchase price can tell you how it is in the market. Spreads and PIPs are a way to understand what the trends are, if they are bullish or bearish so that you can take advantage of them.
- Better decisions: In general, knowing this indicator will help you make better financial decisions, since the more data, the better your analysis and your prediction. They are also very useful as they give us a look at possible price volatility which is important when deciding whether to buy, sell or hold a cryptocurrency.