Cryptocurrency Exchanges are no more the Showcase Product, People want to get into it and acquire Cryptocurrencies. The Crypto Industry will not be the same tomorrow as it is in today. It evolves and updates itself each day that lets CryptoPreneurs enlighten themselves and enhances their vision on more things like Liquidity.Here, let’s discuss why liquidity is important in cryptocurrency exchanges
Hope after the completion of this article, you too have a look at the liquidity of cryptocurrency exchange by Checking the security features and trading features.
What is Liquidity?
In General, Liquidity is the effective exchange of assets into cash without affecting the price of the asset. When it comes to Cryptocurrency Exchange, we need to consider two major factors like Speed and price variation as every trader wants to executive fast and cost-effective trade.
In the Context of Crypto Trading, Liquidity is differentiated in three aspects
- Asset Liquidity – The function between buyer and seller for the desired asset
- Exchange Liquidity – The overall function of traders in the Cryptocurrency Exchange
- Market Liquidity – The overall health of the market
Crypto traders need to evaluate all the above three liquidity before proceeding with trading so that they can spot the perfect asset and the perfect time for trading.
Explore Here: How to gain Liquidity at the time of Launch
Why is Liquidity Important in Cryptocurrency Exchange?
Liquidity is always the indispensable factor in finance and no doubt that good liquidity could automatically build trust among traders in the market
Stability
Liquidity increases stability and prevents traders and cryptocurrency exchanges from market fluctuations. The influence of big market players does not affect the asset. For instance, Buying and selling Bitcoin in bulk could have a minimum impact on the price of bitcoin but in the case of other altcoins, bulk trading could affect the price of the altcoin. The added advantage in Stability is prediction. Traders can predict the market price in the future.
Fair Price
Good Liquidity ensures fair and equal prices for market participants. The reason behind the fair price is the huge volume of buyers and sellers. The asset with high trading activity lets sellers sell it at a competitive price and buyers naturally stick to it. This created a stable equilibrium which is much important for the good market
Fast Transaction
High Liquidity is also the sign of more number of traders so that they buy orders, as well as the sell order would fill out faster than in the low liquidity environment. This increases the trading speed which enriches the user experience.
Accuracy for Technical Analysis
The better the data, the more accurate the prediction. Thus Liquidity gives a huge volume of data for precise calculation
Factors Affecting Liquidity
Numerous factors directly have an impact on Liquidity
Trade Volume
The Liquidity of the specific asset increases with the rise in the volume of the desired asset. Thus lots of Crypto Traders will not use Cryptos for payment, They again invest in cryptos and the chain continues.
Cryptocurrency Exchanges
There are many cryptocurrency exchanges in existence. The enhancement in frequency and the trade volume of crypto exchange increases the liquidity,
Acceptance
The acceptance of Cryptocurrencies is increasing day by day. Many e-commerce sites and popular brands started accepting bitcoins as the mode of payment. This wide adoption is also considered as the factor to adopt cryptocurrencies.
Rules and Regulations
The rules and regulations of various countries and their impacts are also one of the factors that affect liquidity
How to Measure Liquidity?
While measuring Liquidity, we need to consider lots and lots of factors. If you want to find out the liquidity of a specific asset. The best practical way is to look at the 24 hours trade volume in the sites like Aurix Exchange.
Not all the assets have the same trade volume, finding liquidity in practical ways helps you to determine when to trade and what to trade precisely thus it helps in effective trading. The same 24 hours trade volume monetization helps you in finding out the liquidity of Crypto exchanges like Aurix, Binance, CoinDcx, etc.
How to Provide Liquidity to Cryptocurrency Exchanges?
If the Cryptocurrency Exchange can’t complete the trader’s buy or sell order, then the exchange is considered to have low liquidity, thus it does not have enough orders in it. The Crypto Exchange with good Liquidity lets traders proceeds with their trading instantly and easily. They also provide rewards to their traders to encourage their trade activities. On the other hand, Crypto exchanges with low liquidity are struggling to complete a single trade. There is a lot of difference between trading in the high Liquidity exchange and low liquidity exchange.
Bring Liquidity is very much important for any cryptocurrency exchanges, let’s discuss
Third-Party Market Makers
Before getting into this, one needs to clearly understand the difference between a market maker and a market taker
Market Taker: Market Taker does not mind putting more money than the existing market price, the value holding the asset
Market Maker: One who buy or sell an asset for the profit
It is the kind of agreement of replication of liquidity solutions. Here the Crypto Exchange which needs liquidity signed an agreement with some other popular cryptocurrency Exchanges or market makers to use their liquidity. Then, the traders of the new cryptocurrency exchange can proceed with trading by using the liquidity of popular cryptocurrency Exchanges.
When it comes to market takers, Crypto Exchanges will add additional incentives in their agreement like compensation of incomplete lowest trade price ordered in their exchange, And they frequently check out the compensation of market takers price on a daily or weekly basis.
Cross Exchange Market Making
Rather than the third party, Traders act as the market maker. For instance, consider two exchanges, Maker Exchange and Taker Exchange. Both are connected programmatically to execute orders.
The Crypto Exchange which needs liquidity will buy an asset that is listed in the maker exchange and sell an asset instantly in the taker exchange and make a profit from it. In this method, they would not lose their capital and earn a little profit from it. Likewise, they can sell an asset in the maker exchange for the best offer and then sell in the taker exchange. Thus by this simultaneous process, the cryptocurrency exchange can make revenue.
Liquidity Mining
Liquidity mining is the process of gaining liquidity in various methods. This also includes Crypto Stacking, where the cryptos remain in the wallet for a particular period and they gain rewards for holding their assets in the crypto exchange. The open-source software is distributed to all the participants. Miners can set parameters to the software and the reward pools generate automatically by algorithm and distributed among miners.
Risks and Possible Benefits Associated with Low Liquidity
Initially, lower liquidity leads to instability. Price manipulation, Slippage is the risks associated with the lower liquidity environment. This uncertainty would bring serious harm to the traders. On the other side, This instability sometimes brings good fortune to traders as at times, there would be a price hike due to instability.
Conclusion
In the Financial Market, Liquidity is one of the most important factors. It is advisable to trade in a market with high liquidity so that one can enter and exit from the market easily. With the lack of liquidity, occurs the buy and sell off any assets at unfavorable or unappealing prices. Thus, for financial markets, the term liquidity is so important and the crypto exchange which in the recent digital world contributes greater for the global financial sector needs liquidity. Thus, while building your cryptocurrency exchange platform, have a keen look at liquidity.