Technical Concepts

Bid-Ask Spread

Difference between highest buy price and lowest sell price

Definition

The bid-ask spread is the gap between the highest price anyone is willing to buy at and the lowest anyone will sell at. It is the market maker's compensation for two things: carrying inventory it did not want, and the risk of being picked off by someone who knows more than it does. For a taker it is the immediate, unavoidable cost of a round trip, charged before any fee or price impact. AMMs do not have a literal spread, but the equivalent exists: the swap fee is a hard-coded two-sided spread, so Uniswap's 0.05%, 0.30% and 1.00% tiers are effectively a 10, 60 and 200 basis point round-trip cost, while Curve's stableswap pools sit around 0.01% to 0.04% because pegged assets carry far less inventory risk.

The spread is the gap between what buyers offer and what sellers ask. Cross it in both directions and that gap is money you handed to whoever was quoting.

Example

An ETH market quoted at $2,999.50 bid and $3,000.50 ask has a $1 spread, roughly 3.3 basis points. Buy 10 ETH and sell them back immediately and you are down about $10 before exchange fees, which is negligible. Now take a small-cap quoted at $0.92 bid and $1.05 ask: a 13% spread, so the same instant round trip costs 13% of the position. That is why illiquid tokens look profitable on a chart drawn from mid prices and are not profitable at all once you trade them.

How it works

Market makers quote a buy price below and a sell price above their estimate of fair value. The difference pays them for inventory risk and for being on the wrong side of informed flow.

Why it matters

It is the invisible tax on every trade and the honest measure of a market's liquidity. A token with a 10% spread is not worth its quoted mid price to anyone who has to sell it.

What to check

Read the spread together with the depth behind it, compare it with the fee tier if you are on an AMM, watch how it behaves during volatility, and treat suspiciously tight spreads on small venues with scepticism.

Risks to Consider

Spreads widen exactly when you most need to exit, since makers pull quotes during volatility
A tight quoted spread with no size behind it is meaningless: the spread and the depth have to be read together
On AMMs, a fee tier that is too low for the pair's volatility means LPs are underpaid and liquidity eventually leaves
Wash trading on small venues manufactures tight-looking spreads on markets that cannot absorb real size

Common Questions

Why do spreads widen?

Because the market maker's risk went up. Volatility increases the chance that the inventory it just bought is worth less by the time it can hedge, and it also increases the chance that the person hitting its quote knows something. Thin markets, news events and funding stress all widen spreads for the same underlying reason, and the widening is worst in exactly the conditions where retail wants to exit.

Do AMMs have a bid-ask spread?

Not as a posted quote, but functionally yes. The swap fee applies in both directions, so a 0.30% pool charges 0.60% for a round trip, which is the same economics as a 60 basis point spread. On top of that sits price impact, which scales with your size and has no order-book analogue at small sizes. The fee tier is essentially the pool's fixed spread, chosen once rather than quoted dynamically.

What counts as a normal spread?

On a liquid major such as BTC or ETH on a large venue, a few basis points. On a mid-cap token, tens of basis points. On a long-tail on-chain asset, a full percent or several. A useful rule is that the round-trip cost of a spread wider than about 1% makes short-term trading arithmetically hopeless, and a spread wider than 5% means you should size the position as if exiting will be expensive, because it will be.