Liquidity is described as the potential of cryptocurrencies to be converted into fiat currency or any other coin with no compromise on their value. It is deemed vital for a cryptocurrency exchange as it signifies a stable market where investors and traders can trade smoothly, quickly and conveniently. This is why most businesses reinforce their trading platform with robust features that can foster its liquidity and help them shine in the market as the best crypto exchange.
Advantages of high liquidity:
Better and fair crypto prices
A host of traders in the market can contribute to the equilibrium price of the cryptocurrencies. For instance, high trading activities in a robust and feature-rich exchange ensure that buyers could bid at high prices and sellers could sell their assets at competitive prices. This creates stability in the price of the digital assets, which is beneficial for both the buyers and the sellers.
High stability in the market
High liquidity leads to high stability and invulnerability to large fluctuations in the market due to large trades. For instance, investors having a great deal of money can notably influence or manipulate the prices in the illiquid market with a little activity. A single trade order placed by them can bring a lot a variation in the crypto prices, which may fuel volatility in the crypto market. On the contrary, a plethora of orders placed by a large number of traders in the liquid market can effectively maintain crypto price stability and mitigate the volatility.
Fast trading process
A liquid market facilitates and accelerates the execution process of crypto trading. With a large number of traders and investors, the trade orders are fulfilled post-haste. Also, the trades can easily be entered and exited which may be challenging in the fast-paced crypto market.
Accurate technical analysis
Technical analysis is basically defined as the historical market prices of digital assets and the use of this data to envisage the crypto prices with the help of technical indicators and chart patterns. Although many experts do not believe in the accuracy of technical analysis, it is a widely-adopted technique to understand the general market and trading. The liquid market has a relatively more advanced and precise formation of price and charting, which significantly enhances data accuracy.
How market makers help in improving liquidity
A market maker or liquidity provider plays a vital role in developing valuable digital currency trading platforms and setting up efficient market mechanisms. It can be a financial institution or an individual that quotes both a buy and a sell price in a financial instrument. Besides, market makers render liquidity enough to lessen price volatility and allow traders to trade their assets at affordable prices.
Market makers benefit traders and investors by ensuring:
Quick order processing
A market maker implements the best strategies to ensure that a buyer matches with a best seller and vice-versa. When a buyer places an order for a certain currency, the market maker casts around for a seller of the same currency to instantly match the order and minimize the delays.
Well-stabilized spreads
Marker makers make certain that the spreads are stabilized in line with its role to provide and enhance market liquidity. They keep the crypto prices at a fixed and fair level to offer a well-organized entry point for traders.
Market makers enhance the trading volume as well as user count of a cryptocoin exchange. It can further boost the confidence of investors in dealing with the crypto market.
At one fell swoop, liquidity is essential for crypto trading. The higher the liquidity, the more beneficial it is for the exchange as well as the market participants.