What is Crypto Exchange Liquidity?
Liquidity is a critical component of any Crypto Exchange. It’s crucial to understand what Crypto Exchange Liquidity is and why it matters, as well as the elements that influence it and how it’s assessed.
Liquidity is the degree of ease in which an asset can be readily converted into another asset, without affecting its price.
Both the “degree of ease” and the “price” are critical in crypto exchanges. Traders would like their asset to be transferred over as quickly and simply as possible, with the bid price not straying too far from the ask price.
Importance of Exchange Liquidity
- Technical Analysis
Technical Analysis, in a nutshell, is the study of previous data trends from trading activity and the application of that knowledge to anticipate future price changes. Technical analysis will show to be more accurate in a liquid market than analyzing patterns in illiquid markets. Because a liquid market has a larger pool of data from which to draw, anticipating future price movements will invariably be more accurate than forecasting in an illiquid market.
- Market Stability
Market stability is ensured by a market with high liquidity. This implies that huge fluctuations in the market owing to massive trades will have little effect on the market. Big players can have a significant impact on asset values in an illiquid market with limited activity. The high number of traders present in a liquid market, on the other hand, enables prices to remain steady and immune to big fluctuations.
- Fair Prices
Because of the huge number of participants in the market, pricing on a liquid exchange is bound to be fair for everyone. Due to the increased volume of trade, sellers are forced to sell their assets at competitive prices, while buyers are forced to bid at higher prices as well. As a result, an equilibrium market price is established that is fair to both sellers and purchasers.
- Quicker Transaction Time
Because of the huge number of market participants, transactions in high liquidity markets are executed considerably faster than in low liquidity markets. Short-term traders benefit from trading in liquid markets because they can enter and exit trades rapidly.
What Factors Influence Exchange Liquidity?
- Cryptocurrency acceptance
The greater cryptocurrency’s adoption, the larger its liquidity. To extend the utility of cryptocurrencies, businesses (such as PayPal, Amazon, and others) have begun to accept cryptocurrency as a form of payment. There are already over 250 companies that accept cryptocurrency payments.
- Laws and Regulations
Different nations’ laws and regulations might have an influence on liquidity. Government laws affecting cryptocurrencies exist in certain nations, such as the ban of cryptocurrency trading. Because the banning of cryptocurrencies is the same as the prohibition of crypto exchanges, liquidity in such countries would be harmed. Traders would have to look for a seller on their own or utilize peer-to-peer networks. Because there are just a few sellers, such nations would suffer from a lack of liquidity, which would lead to increased prices as demand for crypto exceeds supply.
How is Liquidity Determined?
Liquidity in a market may be measured in a variety of ways. Here are three ways to do so, by evaluating the:
1. Spread (Bid and Ask)
The gap between an asset’s projected sale price and the price at which it was purchased is referred to as the bid/ask spread. Because both sellers and buyers are trading at a price they consider fair, a narrow bid/ask spread indicates that the market is liquid.
2. Buy and Sell Positions
Analysts can observe which assets are being traded the most, as well as how quickly the trade is being fulfilled, by looking at the total number of open long and short (buying and selling) positions. A more liquid market has a larger trading volume and a bigger number of open positions.
The total should also include the number of outstanding purchases or sales of any asset, which includes stop-limit orders and iceberg orders.
3. Total Volume of Trade
The more daily trade volume there is, the more liquid the exchange is. Industry heavyweights like Binance and Huobi, for example, report daily trading volume in the billions, and the statistics can be seen on the exchanges’ individual websites. CoinMarketCap also provides a useful measure called “Avg. Liquidity” is a feature that allows you to rank exchanges in ascending or decreasing order depending on their liquidity score.
You might also be curious about how to determine the liquidity of a given asset. A quick and easy method is to look at CoinMarketCap’s 24-hour transaction volume. You can compare the trade volume of various assets on the site.
Solutions for Brokers
For brokers looking to find a cryptocurrency liquidity provider for their exchange, it is recommended that they consider their own needs and make an informed choice depending on the overall package offered by the liquidity provider, including market depth and fast execution, as well as favorable pricing policy.
For example, B2Broker is proud to offer business owners innovative and high quality solutions. The company falls into the Tier 1 provider category, providing liquidity for all types of assets.