The craze for cryptocurrencies and cryptocurrency exchanges has reached a whole new level in recent times. Cryptocurrency exchanges play a pivotal role in the cryptosphere as a predominant part of the market growth goes to them. Cryptocurrency exchanges have offered lucrative opportunities to many entrepreneurs and investors, which is why every upcoming entrepreneur wants to own a cryptocurrency exchange software.
If you are interested in launching your own exchange as well, it is important that you gain thorough knowledge about the most crucial factor for a cryptocurrency exchange, liquidity. What is liquidity? Why is it important, and how does it benefit your exchange? Let’s discuss all about it further.
What does Liquidity mean in a cryptocurrency exchange?
Liquidity refers to the measure of ease with which an asset can be bought and sold for cash without affecting the price stability. Simply put, liquidity is the factor that decides the ability of how quickly an asset can be converted into cash. A common aspect among all the liquid assets is that they all have an open market and are ready to trade. Illiquid assets are mostly traded privately, whereas liquid assets are traded on public exchanges. Why is liquidity important for your exchange? What are the benefits? Let’s find out.
What liquidity offers to your exchange?
If you are an agile crypto enthusiast, you would know that whenever you hear about crypto exchanges, the term “ liquidity” comes along with it. This is because liquidity brings in the most essential benefits for your cryptocurrency exchange software such as the following.
- Fairness and Stability of Prices
It is only fair that the prices are equal for all the participants in a liquid market. One of the major factors that gives rise to this fairness of prices is a large volume of buyers and sellers. A marketplace with maximum trading activity ensures that the sellers sell the assets on a competitive price, and the buyers bid at higher prices which creates a balance and stability. The more liquid the market is, the more stable it becomes. While purchasing or selling an asset, there are always plenty of other traders willing to fill the order with minimum price impact on the asset. A less liquid asset will definitely have its price be affected by a larger trade. A more liquid asset, on the other hand, is more stable on both individual trades and the market on the whole.
- Resistance to Price Manipulation
With crypto regulations still yet to expand, and with the involvement of counterfeit players from all around the world, the crypto market has a long record of manipulation of prices. One of the most important causes for this is the lack of liquidity. An illiquid market allows an individual or group of actors to manipulate the price to benefit from it, whereas more liquid assets and exchanges are more resistant to manipulation.
- Faster Transactions
A highly liquid market stimulates quicker transactions. More the liquidity, faster the orders get filled compared to an illiquid market. It helps users with efficiency, as well as with entering/ exiting the market quicker according to favorable market conditions.
- Technical Analysis
Higher Liquidity volume helps with the accuracy of technical analysis. Technical analysis is the study of past prices of cryptocurrencies and the use of technical indicators and charting patterns to foresee the prices of cryptocurrencies. With greater liquidity, price and charting formation is more developed and accurate.
Factors that Influence Liquidity
- Cryptocurrency exchange platforms
Cryptocurrency exchanges are the key to exchange cryptocurrencies and boost up profits. The capacity of trade determines the volume of liquidity of a cryptocurrency. The volume of a cryptocurrency being traded on an exchange platform, and the frequency in which it is traded boosts the liquidity of the cryptocurrency. And the rise of volume of trading helps to boost the market liquidity.
- Wider Acceptance
The wider the acceptance of a cryptocurrency is, the higher its liquidity volume increases. This is why it is important for cryptocurrencies to be accepted as a mode of payment by businesses to increase the visibility and usability as a viable mode of transactions. Today, cryptocurrencies have achieved huge traction, and many popular corporations have accepted them into their businesses like Amazon, eBay, PayPal, Microsoft, Apple etc.
The regulations of the government somehow affect the cryptocurrency exchanges and their liquidity. It is not possible for an exchange to stimulate larger trade volumes without being backed by a bank for fiat money support. However, since cryptocurrencies are not controlled directly by a central authority, crypto trades will still continue.
What are the ways to improve liquidity for your crypto exchange software?
- Market Making
Market making is a process through which a trader provides liquidity for the buyers and sellers in the market. Market Makers make the crypto market more efficient for traders as they help reduce price volatility and bring in fair prices. The liquidity of a cryptocurrency exchange software largely depends on market makers. Due to the decentralized nature, crypto price might differ across various exchange platforms. Therefore, without market makers, the cost of cryptocurrencies will differ from their market price. Market makers take the responsibility of the efficient buying/selling and execution of orders. Therefore, more orders, more trading activity induces more liquidity.
- Methodology of crypto exchange development
Improving your liquidity volume also depends upon the way you choose to build your exchange. For example, if you are building the exchange all the way from scratch, you can boost liquidity for your exchange by the following methods,
- Creating artificial accounts within the exchange, and simulating trade activities between them which will increase the liquidity volume.
- Connect your exchange API to an external exchange with high volume liquidity which will automatically boost yours.
- Join a network of crypto exchanges whose liquidities are tied together.
To do it in a more efficient and a quicker way, the best option is to choose a white label cryptocurrency exchange. As white label exchanges are readily available with everything required for the exchange to run smoothly, including liquidity, it will be easier for you to compare and choose the right one that offers more liquidity.
To conclude, the most important factor that determines the operational efficiency and the performance of an exchange is liquidity. The higher the liquidity, the more the business is beneficial for both the exchange owner and the trader. Therefore, pay utmost attention to liquidity while developing your crypto exchange software.