Importance of Liquidity in Crypto-Exchange
The Solidity Of Liquidity’s Relevance in Cryptocurrency Exchange
You know you have grown up when the term ‘liquid’ moves from Physics and Chemistry to finance and investments. Liquidity finds parallel mentions in any investment-related opportunity. Since cryptocurrency is slowly shaping itself up to be a viable investment platform, it is important to understand liquidity and the importance of liquidity in the cryptocurrency market. Needless to say, liquidity is of utmost importance when it comes to the process of cryptocurrency exchange development.
What is liquidity?
Before understanding why liquidity is important in the crypto market, it is important to understand what liquidity is! Liquidity is a measure of the relative ease with which an asset can be converted into cash or any other kind of currency. Since cash is the most readily available and easily spent transactional instrument, cash is considered to be the de facto standard to get the liquidity of an asset.
Based on the magnitude of liquidity, the assets can be segregated into liquid and illiquid assets, although there might not be a clear line of segregation between both. A common attribute that you can find among all liquid asset is that they all have a ready and open market to trade. While the illiquid assets are traded privately, most of the liquid assets are traded in public exchanges.
To encapsulate everything, the harder an asset is to encash, the less liquid it is.
Why is liquidity important?
In the context of cryptocurrencies, liquidity refers to the ability of a coin to be converted into cash or other coins. Liquidity brings with it, a lot of advantages
Fairness of Prices
In a liquid market, the prices are bound to be fair and equal for all the market participants. One of the most important reasons that contribute to this fairness of price is the large volume of buyers and sellers. A marketplace with high trading activity will ensure or rather force the sellers to sell at competitive prices and the buyers will naturally bid at higher prices. This creates an equilibrium which was to be equitable for all the parties involved. The stability of that equilibrium is one of the greatest indicators of market stability. The most direct implication of market stability is fairness in pricing.
Market Stability
High liquidity ensures that the market will suffer swings in prices because of large trades. There have been instances when the prices of illiquid assets have been radically altered and even manipulated because of big players in markets that do not have much activity. Since liquidity increases the number of investors, even large trades will not affect the stability and the prices.
Faster Transactions
When something is said to be easy in the market for investments, it has to be essentially quick! It is convenient to buy or sell cryptocurrencies of your choice in a liquid market as the orders will be quickly fulfilled because of a demand and a proportionally healthy supply. This property has given rise to short term trading where you can quickly enter and exit a trade.
Data Volumes for Technical Analysis
Technical analysis of past prices and charting patterns of cryptocurrency is probably the forerunner of big data. While there might be arguments for and against technical analysis, it still remains one of the most widespread methods to predict the price and the landscape of values with cryptocurrencies. Any person who deals with big data will tell that the bigger the pool of data the more accurate the prediction is, and liquidity is what gives huge volumes of data for technical analysis.
It is quite evident that liquidity is important when it comes to general trading, and the cryptocurrency market cannot be an exception. There are a lot of factors that affect quality. Let us look at those factors and how they influence liquidity.
Trading Volume
A lot of users who purchase cryptocurrencies do it for the sake of investment and trading rather than using it as a medium of transaction. The volume, with respect to cryptocurrency trading, usually refers to the number of coins that have been created in the past 24 hours. The greater the volume of a specific coin, the greater the activity and the liquidity.
The Cryptocurrency Exchange
The exchange is a marketplace where assets are traded between buyers and sellers. If a specific coin is accepted by a wide range of marketplaces, it would mean that the particular cryptocurrency is highly liquid. The increase in the number of exchanges also increases the frequency and volume, the benefits of which we have seen earlier. There are over 200 cryptocurrency exchanges out of which a 10th is decentralized. However, there is a lot of effort being taken by both financial corporate giants and regulated stock exchanges to integrate cryptocurrency and security token into their ecosystem of trading. Any cryptocurrency exchange development company has to take into consideration the coins that can be exchanged using that particular exchange platform.
Acceptance
The credibility, the volume and the cryptocurrency being accepted by the exchange depending on the acceptance of the currency by masses. It is important for cryptocurrencies not only to be accepted by the masses but also by merchants so that it can result in better credibility and liquidity. One of the finest examples of cryptocurrencies being accepted can be none other than Bitcoin, the Big Daddy of cryptocurrencies. Bitcoin is being accepted as a transactional instrument by a few global companies like Amazon, Apple, Microsoft, and PayPal.
Regulations
It is one of the very few aspects where the steps have to be taken by the authorities. The laws and regulations in different countries directly impact cryptocurrency liquidity. There are some countries that have shown their resistance towards cryptocurrency trading and these practices would impair the liquidity of a particular cryptocurrency in that geography. While decentralization might help in this regard, there is also a great possibility of fraud and higher prices. Bringing in the practice of cryptocurrency trading under the umbrella of regulation will catalyze all the above-said advantages.
Blockchain App Factory brings its vast knowledge on coins, exchanges and the business of trading to facilitate any part of the cryptocurrency trading system that you would like to integrate your business with.
