Why Is Liquidity Important To Cryptocurrency Exchange?
By on Altcoin Academy
Liquidity, defined as the ability of a coin to be converted into cash or other coins without compromising cryptocurrencies’ value, is pivotal for every cryptocurrency exchange.
High liquidity indicates a vibrant and stable market where participants can trade quickly, easily and at fair prices. Considering the same, majority crypto exchange development processes are focused on reinforcing exchange platforms with features that help improve liquidity.
High liquidity brings the following benefits to the cryptocurrency market:
Better and Fair Prices for Everyone
A large number of buyers and sellers in a liquid market contribute to a fair price for the participants. For example, a robust marketplace with high trading activity ensures that sellers could sell their digital assets at competitive prices while buyers could bid at higher prices. This creates an equilibrium market price that is fair for both buyers and sellers.
Market Stability
High liquidity ensures high stability and invulnerability to large swings in the market due to large trades. For example, whales (individuals with a huge amount of money) can significantly influence, or in worse scenario, manipulate prices in illiquid markets with little market activity. A single buy or sell order could lead to large fluctuations in cryptocurrency prices, thereby resulting in increased volatility and risks for the cryptocurrency market. Conversely, a large number of participants and orders in the liquid market efficiently help cater large orders and maintain relatively stable prices.
Quick Transaction Time
A liquid market accelerates and simplifies the process to buy and sell cryptocurrencies. Given a large number of market participants, buy and sell orders are fulfilled much faster. Traders can quickly enter or exit a trade, which can sometimes be challenging in the fast-paced digital currency market.
More Accuracy for Technical Analysis
Technical analysis is defined as the study of past prices of cryptocurrencies and the use of technical indicators and charting patterns to envisage cryptocurrency prices. Although many individuals disagree with the accuracy of technical analysis, it is a widely-adopted methodology to comprehend the general market and trading. The liquid market has a more developed and precise formation of price and charting, consequently leading to enhanced accuracy.
The Role of Market Making in Improving Liquidity
Market making is becoming increasingly important in the cryptocurrency market, and among businesses availing cryptocurrency exchange development services, to ensure high liquidity. Market makers play a pivotal role in building valuable cryptocurrency exchange platforms and establishing efficient market mechanisms. A market maker can be a financial institution or an individual that provides bids and come up with prices corresponding to cryptocurrencies. In addition, market makers provide sufficient liquidity to reduce price volatility and enable traders to buy and sell digital assets for reasonable prices.
Market makers create opportunities and benefits for investors by ensuring the following:
Quick Processing of Orders
A market maker adopts strategies to ensure that a buyer is the best match for a particular seller and vice versa. When a buy order is placed for a certain currency, the market maker searches for a seller catering to the same currency and matches the orders. The goal is to minimize delays in order fulfillment.
Well-Stabilized Spreads
Market makers ensure that the spreads are stabilized in line with its role to provide market liquidity. They fix cryptocurrency prices and keep them at a reasonable level to provide a well-organized entry point for traders.
Market makers make cryptocurrency exchange platforms more easy, convenient and efficient for market participants. It can increase investors’ confidence in dealing with the financial markets.
To sum up, liquidity is crucial in cryptocurrency trading. The higher the liquidity, the better it is for both exchange and market participants.
