Liquidity Management: A Comprehensive Guide
To maintain the balance of any market, maintaining liquidity is of prime importance. Liquidity doesn’t mean evading price fluctuations of an asset altogether but controlling the occurrences of drastic changes. These oscillations are crucial in getting better returns in the long run which makes these tradable assets valuable. The aim is to create a balance between compatible buyers and sellers which maintains a movement of these assets in the market.
Importance of cryptocurrency liquidity
Due to a high number of buyers and sellers present in a marketplace, high liquidity becomes an ideal situation as it provides with a price bar that is favorable for all.
1. Better and Fair Prices for all involved
The prices set in a liquid market are much fairer due to the presence of many buyers and sellers. In a robust marketplace, sellers keep competitive prices for the tradable asset to ensure that they don’t lose out on buyers. On the other hand, according to their requirements, buyers offer higher prices for the asset. All this together creates an equilibrium in the marketplace and setting a price that is acceptable for all. This stability in price represents a marketplace where no participant is at a disadvantage.
2. Market Stability
In a highly liquid market, large trades don’t affect the asset prices to a great extent which remains comparatively stable. Whales, a term used for individuals with a substantial amount of money, can greatly influence the market price of an asset in illiquid markets. In the case of cryptocurrencies, a single purchase or sell can create a huge fluctuation in its market price, making the market more volatile and riskier.
In the case of a liquid market, the stability of price is maintained by the presence of a large number of market participants, making it less prone to huge fluctuations caused by these buy and sell orders.
3. Less Transaction Time Taken
Liquid market ensures the easier and quicker sale and purchase of preferred cryptocurrencies in a liquid market because of a higher level of market participation. Faced paced crypto markets makes it critical for a trader to swiftly enter and exit a trade, which is possible in liquid markets.
4. Augmented Accuracy for Technical Analysis
Prediction of cryptocurrency prices by studying the past prices of that currency, employing technical indicators and charting previous patterns is known as technical analysis. Although many people don’t trust these technical analyses, they aid in comprehending the general market and trading. However, the accuracy of these technical analyses is more accurate in case of a liquid market due to developed price and charting formation.
Factors that Affect Market Liquidity
There are several factors which affect the liquidity of the cryptocurrency market. Some of them are mentioned below:
1. Trading Volumes
Trading volumes is a crucial element that affects the liquidity of a cryptocurrency market. Volume is the term given to the number of coins traded on an exchange within a time span of 24 hours. This volume is reflective of the amount of market activity that is taking place for that specific coin. More trading means mean higher volume.
In the case of cryptocurrencies, people usually purchase cryptocurrencies as an investment and trade them when their price appreciates. They don’t use it as a medium of exchange, causing their trade volume to be high. The expansion in trading volume has enhanced the market liquidity of cryptocurrencies.
2. Usability
The utility of cryptocurrencies is also a deciding factor of its market liquidity. Using them as a medium of payment increases their liquidity by boosting their transaction volume. It is because of this reason that merchants are being encouraged to accept cryptos as a mode of payment.
3. Regulations
Another major element that influences the market liquidity of cryptocurrencies is their regulations. Every nation has its own stance on cryptocurrencies. Some have an open mind towards them and have accepted them, some perceive them as dangerous and banned their trading within their jurisdiction and some nations are still dicey about their stance. Despite these circumstances, cryptocurrencies have managed to grow at a rapid speed. Favorable regulations by the respected authorities on matters like consumer protection and taxation will only result in greater adoption of these digital assets and increase their market liquidity.
We at TokenAsia, provide best liquidity management services in terms of effective cost saving. The experienced personnel in TokenAsia team have gathered great knowledge that assists us to develop various effective strategies for token liquidity. Our client’s needs determine our choice of strategies and the multiple PAIR’s use to manage token liquidity.
Conclusion
The rise of cryptocurrencies on the back of decentralization is bound to lead to fluctuating trading volumes. At this critical juncture where cryptocurrencies get delisted on not being able to meet the minimum threshold requirements, liquidity management services step up to fill the void and ensure that the vagaries of the crypto-verse do not have a disproportionate impact on the morale and prestige of the respective cryptocurrencies.
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Originally published at blog.tokenasia.com on February 20, 2019.
