- Jakob Brezigar
- Updated: July 31, 2025
- Reading time: 6 min
What Are Spreads: Key Definitions, Types & Importance
At Orcabay, spreads are at the heart of token‑market liquidity and trading costs. In finance and crypto, a spread is the gap between bid (what buyers pay) and ask (what sellers expect) prices. It signals market liquidity and directly affects trade profitability.
Understanding spread dynamics — including percentage spreads, depth impact, and volatility conditions — is crucial for informed trading and professional market making.
Orcabay, an experienced market maker active on over 50 exchanges — including Binance, Bitstamp, Kraken and Coinbase — specializes in delivering tailored liquidity solutions. Contact us to learn more!
Spreads are foundational to trading dynamics—especially in crypto markets where liquidity and execution costs matter. In finance and digital asset trading, a spread generally refers to the difference between two related prices or rates, most commonly the bid–ask spread: the gap between what a buyer is willing to pay (bid) and what a seller is willing to accept (ask).
What exactly is a “spread” in finance and crypto trading?
In finance and crypto trading, a spread refers to the difference between two prices—typically the ask price (what sellers want) and the bid price (what buyers offer). This gap is known as the bid–ask spread, and it represents the implicit cost you pay when executing a trade quickly. To calculate it:
- Spread (absolute) = Ask price − Bid price
- Percentage spread = (Ask − Bid) ÷ Ask price × 100%
For example, if Bitcoin has a bid of €29,950 and an ask of €30,000, the spread is €50, or approximately 0.17% of the ask price. This amount essentially reflects the cost a trader pays when buying at the ask and immediately selling at the bid.
How does spread reflect liquidity and cost?
The spread acts as:
- A liquidity indicator: Tighter spreads generally indicate high liquidity; wider spreads suggest thin order books or higher risk.
- A friction cost: Traders executing market orders “lose” the spread, affecting profitability even before fees are applied.
- A market maker’s profit margin: Liquidity providers post both sides of the quote, earning the spread while managing inventory and volatility risk.
In crypto markets, the bid–ask spread is shaped by the same mechanics as traditional finance: the interplay of buyer and seller orders in exchange order books. It is a critical element of cost and liquidity analysis that every trader and market maker must understand
What other types of spreads exist in financial markets?
Bond or yield spreads
These measure the yield difference between two debt instruments (e.g. corporate vs. government bonds) and can signal credit risk or value disparity.
Options and futures spreads
In derivatives, “spreads” describe multi-leg strategies—such as calendar spreads or bull‑bear spreads—used to manage directional risk or volatility exposure.
What KPIs & frameworks matter to traders and liquidity providers?
Core KPIs for spreads
- Average spread (absolute & percentage)
- Time‑weighted average spread (TWAS): tracks performance over time, useful in algorithmic quoting
- Book depth at best bid/ask: indicates immediate liquidity
- Fill rate and slippage: show efficiency of execution under market stress
Risk & compliance considerations
Monitoring volatility-adjusted spread widening can signal market stress. Institutional market‑makers must also comply with regulatory regimes such as MiCA in the EU and disclosure reporting under evolving U.S. bills like CLARITY and the GENIUS Act.
How are spreads evolving in 2025–26 regulation and market structure?
Regulatory trends shaping spreads
- MiCA enforcement in the EU (fully applicable by December 2024) mandates standardized rules for crypto‑asset service providers, transparency, and liquidity obligations.
- In the U.S., the GENIUS Act and the CLARITY Act (recent House passage and Senate draft) aim to establish definitions, issuer disclosures, and robust oversight—including limits on stablecoin issuance—with implications for liquidity and prize competition.
- Broader crypto market structure reform is gaining bipartisan traction, with discussions on classification of assets, trading platform regulation, and issuer transparency requirements
Impact on spreads and liquidity provision
- Greater transparency and disclosure should reduce informational asymmetry, potentially narrowing spreads.
- Regulatory capital and reserve requirements may limit over-leveraged liquidity, widening spreads in less regulated venues.
- Institutional market-making via licensed venues is likely to increase competitive quoting, compressing spreads in regulated environments.
What to expect in 2026
- Further clarifying amendments under MiCA and U.S. legislation, leading to standardized spread reporting.
- Growth in fully regulated derivatives trading platforms and institutional participation, tightening spreads for popular token pairs.
- Continued innovation in quoting algorithms, enabling dynamic spread adjustment based on market parameters, risk exposure, and compliance constraints.
Why Orcabay invests in spread optimization in token markets
As a specialized crypto market-making and liquidity-management firm, Orcabay focuses on:
- Posting competitive two‑way bid–ask spreads across centralized and decentralized venues
- Using algorithmic strategies (like dynamic spread adjustment, arbitrage defense, order‑book scalping) to capture spread profits while managing inventory risk
- Tracking KPIs such as average spread, TWAS, fill rate, and slippage, fine‑tuning quoting logic accordingly
- Complying with EU MiCA and future U.S. frameworks by integrating disclosure, risk reporting, and liquidity metrics into dashboards and regulatory filings
Conclusion
In both traditional finance and cryptocurrency trading, the bid–ask spread—a difference between the highest price buyers are willing to pay and the lowest price sellers are ready to accept—serves critical purposes. First and foremost, it reflects the market’s liquidity: tighter spreads generally signal active markets with abundant buyers and sellers, while wider spreads suggest thinner liquidity, heightened risk, or elevated volatility. When a trader buys at the ask and immediately sells at the bid, that gap translates directly into a hidden cost, even before accounting for explicit fees or commissions.
Market makers and liquidity providers depend on spreads as their primary compensation mechanism: they continuously post both bid and ask quotes and earn the difference while managing inventory and price risk. In crypto markets, spreads are generated by the structure of exchange order books, and assets with deep order books—like Bitcoin or Ethereum—typically build narrower spreads than less liquid altcoins.
Mastering the mechanics and dynamics of spreads is essential for professional traders and market makers alike. It underpins execution cost analysis, liquidity strategy, and risk mitigation. Ultimately, the bid–ask spread embodies the intersection of supply and demand, market structure, and trading efficiency, making it a foundational metric in any liquidity-driven environment.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, investment, or other professional advice. All opinions expressed herein are solely those of the author and do not represent the views or opinions of any entity with which the author may be associated. Investing in financial markets involves risk, including the potential loss of principal. Readers should perform their own research and consult with a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
Jakob Brezigar
Jakob, an experienced specialist in the field of cryptocurrency market making, boasts an extensive international presence. With Orcabay, he has skillfully managed major operations and deals for a wide array of global stakeholders.
