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Bybit Learn
Bybit Learn
Beginner
Sep 14, 2022

Latency

Latency is the time discrepancy in data transmission between a network’s input and received output, which in the crypto world refers to the time delay in crypto transactions.

What Is Latency?

In the highly digitalized world, latency determines how quickly data can be transmitted between systems. Low latency means that data is transferred at a fast speed with minimal delays, while high latency means slower data transmission with longer delays. 

Trading platforms strive for ultra-low latency. For traders to place and execute orders in a timely fashion to secure the best trading prices, factors such as network speed and technological advancement can affect latency. This, in turn, has an impact on how quickly an order can be placed and executed. 

In the crypto world, latency can refer to either the latency in a blockchain network or crypto exchange. The latency of a blockchain network is the time between transaction submission and confirmation by the network, whereas the latency of an exchange is the transaction processing time taking place on the network. Crypto exchanges require ultra-low latency in order to process the high volumes of transactions on their networks, and to manage high volatility so that traders can take advantage of real-time asset prices.

How Does Latency Affect Crypto Trading?

While latency is important for any online exchange, its impact is even more pronounced for cryptocurrencies, whose volatile prices may fluctuate within fractions of a second. Crypto’s high volatility can be attributed to its general hype and unpredictability, where every millisecond of delay can result in a significant difference in pricing. 

To cater to the rapidly changing pricing information, crypto networks and exchanges are expected to be optimized. That way, they can efficiently process the large volumes of data that come through in short time intervals, with minimal delay and latency. The network or exchange inspires its users’ confidence by assuring them that trades are being processed in real time.

May Lead to Arbitrage Trading

The lack of conformity in the processing speed and network infrastructure across crypto exchanges may lead to arbitrage trading, whereby users can profit from price discrepancies they discover on different platforms. Capitalizing on these price differences, however, requires low latency in the exchange as well.

As a result, networks and exchanges with lower latency attract more users to their platforms. Widening performance disparity among networks means that exchanges with higher latency get left behind. The same is applicable to users as well: Only users with the necessary resources — including fast internet speed — may be able to enjoy the benefits and opportunities that come with low latency for their transactions, especially in arbitrage trading.

Importance of Low Latency for Crypto Exchanges

In a highly volatile market like crypto, time is of the essence. Only by having low latency in crypto exchanges can users capitalize on a favorable position, since any delay can result in price drops which affect traders’ profit margins. For example, latency can derail a planned trade for BTC at $21,430.94 that winds up with the price increasing to $21,431.04 by the time the order is placed. Obviously, this will affect the profitability of large trades. Low latency in a crypto exchange may make it more lucrative for users to trade there because they’re able to trade at or near the exact price they’d originally intended.

With more institutional investors venturing into the crypto space and making much bigger trades than individual investors do, crypto exchanges will increasingly need to rise to the expectations of these investors by optimizing their processing speed to keep their latency low. In this way, they improve their chances of attracting these investors to their platforms. 

The demand for transaction and processing speed is further expedited by algorithmic trading, in which trades are made digitally and automatically by computers programmed to execute certain strategies. This in turn has led to the advent of high-frequency trading (HFT). While not every crypto exchange can offer HFT, there is some urgency to compete with these automated systems which function on algorithms to ensure ultra-low latency. Therefore, crypto exchanges have to maintain low latency to make their platforms attractive to their users, especially institutional investors.