The usage of cryptocurrency shows an exponential data day by day, the crypto market is also becoming pervasive. But not all exchanges have a high user count. In order to conduct immediate settlement and to channelize the buy and sell mechanism, every stock/ Bond/ Digital currency needs a market with higher liquidity.
Not only that, in early 2019 a study on daily cryptocurrency trade volume of exchanges were conducted and it was found that nearly 56 platforms had faked their volume. So, CoinMarketCap announced that liquidity will become the default metric for ranking cryptocurrency pairs and exchanges.
In this blog, you will get to understand why liquidity is so important for the Crypto exchanges.
What is Liquidity?
Liquidity can be referred to as the extent to which a specific asset is bought and liquidated without affecting the general stability of its price. The higher the liquidity of an exchange platform, the higher will be the user engagement.
According to the terms of liquidity, an asset can be classified as a liquid and illiquid asset. Mostly, all the liquid asset have a open market to trade while the illiquid assets are traded privately. In simple terms, when its harder to encash an asset, it is said to be illiquid.
Importance of Liquidity
Liquidity plays an important role during Cryptocurrency exchange development.
Fair trade prices- With good number of Crypto investors/traders on an exchange platform, there would be a maintenance of the system. This is because, the platform with high trading activity will make the seller to bid at competitive prices thus naturally allowing the buyers to bis at higher prices. This creates an equilibrium which indicates market stability. Directly implying the fairness in pricing.
Market stability- Even large trades don’t affect the stability and the prices as the liquidity increases the number of investors.
Faster transactions- Faster transactions will be carried out on a platform with higher liquidity as the orders will be quickly fulfilled based on the demands and the supply.
Data Volumes for Technical Analysis- The larger the data pool, the more accurate the prediction about the technical analysis will be. The past prices and charting patterns remains one of the major methods to predict the price and landscape of values with cryptocurrencies. Liquidity is what gives huge volumes of data for technical analysis.
Factors affecting Liquidity
Below are the factors that influence Liquidity majorly. Let us look at those factors and how they influence liquidity.
Trading volume- Mostly people use cryptocurrency as a investment rather than a medium of exchange. In cryptocurrency trading, the volume is based on the number of coins that have been created in the past 24 hours.The liquidity and the activity will be higher when the volume of a specific coin is higher.
Cryptocurrency Exchange- The more the number of Crypto exchanges, the higher the market activity.This rise in the frequency and volume of trading helps to increase market liquidity.
Acceptance- It is important for the exchange platforms to be accepted by masses as well as merchants in order to create a better credibility and liquidity. The best example would be the acceptance of bitcoin as a transactional material by the global companies like Amazon, Apple etc.
Regulations- Different countries have different set of rules for the usage of cryptocurrency. These laws will directly influence the Crypto liquidity. Certain countries have restricted the Cryptocurrency, this leads to the impair of liquidity of a particular cryptocurrency in that geography.
Ways to solve the liquidity problem
Listing of cryptocurrencies- With more listed Cryptocurrencies in your exchange, you can attract more users.
Adding of payment streams-By adding up different payment streams such as wallet service, credit card, debit card or crowdfunding will facilitate trading thus enhancing the user count.
Access to multiple order books- Getting listed in multiple crypto exchange and carrying out trade through many exchanges helps to maintain liquidity.
Insertion of advance trading features- It boosts profitability by enabeling the investors to buy and sell the stock at specific price.
Intuitive interface A user friendly interface allures the Crypto traders to your platform.
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