A Quick Summary
As ironic as it may sound, liquidity is probably what solidifies the stance of exchange in terms of reliability and dependability. Liquidity as a concept might be easy to understand but achieving liquidity, especially in the crypto realm is a lot more difficult than it sounds on paper.
In this article, we have unraveled the art of enhancing liquidity in your crypto exchange. In addition to the core, we will also touch up on the basics of a crypto exchange and liquidity.
What Is A Crypto Exchange?
Just like a multi-currency exchange that specializes in forex trade, a cryptocurrency exchange is a platform that facilitates trade between multiple crypto coins. Cryptocurrency has always been in the realm of uncertainty when it comes to being accepted as a mainstream mode of transaction. The volatility of the coin’s value of even the most dependable cryptocurrency – the bitcoin – has been fluctuating between $3000 and close to $20,000. It might not be a great idea to keep speculating on the price of a currency, especially if it is going to vary this drastically.
Therefore, as an alternative to making profits in the crypto realm, crypto exchanges were introduced. These crypto exchanges capitalize on the fact that the prices of coins fluctuate. Apart from helping the trader, they also help the exchange as business make their profit.
However, for an exchange to establish its supremacy in the circle of traders and to position itself as a profitable business option, one of the most important factors that need to be taken into consideration is liquidity.
What Is Liquidity?
Outside the context of a crypto exchange, liquidity is defined as the degree of ease with which a particular as it can be quickly bought or sold. It can, otherwise, be described as the ease with which an asset can be converted into cash.
The second definition stems from the fact that cash is considered the de facto standard for liquidity – cash is the most liquid form of asset available. It is considered exceedingly easy to transact with cash as it can be used for buying, selling, paying debts, and meeting any immediate need that you might have.
The Vitality Of Liquidity
In the context of a crypto exchange, liquidity is one of the most important factors that needs to be taken into consideration when you would like to embark in the business of building a crypto exchange software.
The magnitude of ease, in the context of crypto trading, would be proportional to the number of traders or to be more precise, the number of trades happening over a period of time. Cryptocurrency, in addition to this obvious advantage, also presents a few other advantages:
- Fairness In Pricing
Liquidity creates a balance between the prices offered by sellers and the bids of buyers. In a robust market place, liquidity ensures that sellers would sell at competitive prices so that they do not lose out on their chance to be sold. Parallel to this, the buyers but also bit at higher prices proportional to the level of desperation. This creates a proper equilibrium in the market which results in price stability – one of the best signs of market stability.
– Enhanced Market Stability
The enhanced degree of liquidity ensures that the prices do not keep wavering. This aspect comes into light in case of large trades that might result in market swings. Certain ‘Whales’ tend to manipulate prices of certain assets in an illiquid market by high-volume purchases. However, in a liquid market, the prices are stable enough to withstand large orders because such a large volume of purchase makes only a negligible dent in the price landscape.
– Accuracy Of Analysis
Any big data expert would agree that the degree of accuracy in prediction is proportional to the volume of data that is studied. Therefore, higher liquidity also means that traders have better data to study the market and better intelligence to gather before they embark on their next trade.
- Faster Transactions
This is one of the most obvious advantages – if there are many people selling and buying, it is easier and faster to trade an asset in an exchange. This applies for a cryptocurrency exchange platform as well. This is one of the most critical advantages because of the swiftness with which prices of cryptocurrencies keep fluctuating. Since the prices are susceptible to quick rises and falls, it should be possible for a trader to quickly enter or exit the trade.
How To Enhance Liquidity
Now that it has been established beyond question that liquidity is an important feature for any cryptocurrency exchange software solution, let us look at the ways in which liquidity can be enhanced.
– Attract Market Makers
A market maker, as the name would vaguely define, is a company or an individual that regularly buys and sells financial assets at a publicly quoted price. As you may have inferred, they do the service of providing liquidity to the markets. As long as they keep trading in volumes that satisfy market demands, liquidity keeps increasing.
Market makers are vital to any crypto exchange. Cryptocurrency exchange solutions can attract market makers by either decreasing the make a training face or sharing a profit. Market makers are also available as a service for a fixed cost that they may charge.
– Reduce Commissions
Every exchange makes its profit through commissions it charges for a free trade. These commissions are charged as a percentage of the trading position. One of the factors that traders will look for when choosing an exchange is the commission rates.
To enter a market that is highly competitive, bringing down your commission rates to 0 will attract a lot of traders. This increase in participation will result in enhanced liquidity.
– Automate Market Makers
We have already seen what market makers can do. What if the same market makers can be ’emulated’? This is what precisely happens with automated market makers. They are bots programmed to execute trades that help in a breakeven. There have been instances when this automation of trade execution was designed to be deployed at the discretion of the exchange provider even during times of high volatility.
– Make Trading Simple
Right from cryptography to cryptocurrency, the presence of the term ‘crypto’ has always entry to people and has been attached to something that was considered complex and difficult for an average Joe to comprehend. If you can beat this perception by making your cryptocurrency exchange extremely user-friendly, it will automatically result in higher participation even from technologically naive traders.
Conclusion
It is quite obvious and established that liquidity is one of the most important factors that can make or break any cryptocurrency exchange platform. Therefore, you should take into consideration the factors that enhance liquidity right at the time of developing your cryptocurrency exchange software.
However, building your own crypto exchange platform from scratch can be quite a daunting and cumbersome task. As an alternative, you can consider using white label cryptocurrency exchange software. There are companies that specialize in the development and customization of this white label cryptocurrency exchange solution. All you need to do is get in touch with them. They will take care not only to understand your requirements but also to customize your exchange in such a way that it bears your brand language and complies with all the legal requirements of your jurisdiction.
