When choosing a crypto exchange, investors need to consider many features and benefits. One of the most important ones is liquidity. It refers to how easily a user can buy or sell crypto on the platform without causing a significant problem with the prices.
If you’ve ever used a crypto trading exchange before and noticed a sudden drop or spike in crypto prices, chances are that it’s due to liquidity issues. In this article, we’ll further explore liquidity and its implications on trade.
Why Liquidity Matters for Trade?
In crypto trade, the liquidity of the exchange can make or break a trader’s trade.
Trade speed: In a liquid market, the trades are executed instantly. In many cases, they are much faster and more convenient than the ones made with fiat money, as there are no centralized structures to wait for. However, if the market isn’t liquid, the trades slow down and sometimes halt altogether. In turn, this affects the price of the asset.
Price stability: This is the key feature when choosing and creating a trading strategy, as it needs to be based on the predictability of prices. However, when there are no buyers and sellers to make the trades, the prices can suddenly spike or plummet and, therefore, render all trading plans useless.
Smaller Spreads: The spread is the difference between the buy price (the highest someone is willing to pay) and the sell price (the lowest someone is willing to sell). When the spread is tighter, there’s less profit in concluding a trade. In turn, the loss of the profit motive may lead more investors to give up on trading and thus further hurt liquidity.
How Low Liquidity Affects Trades?
Low liquidity can have a damaging effect on the trades, and there are a few events that investors should be aware of as they point to liquidity issues.
Slippage: Slippage happens when the price you expect to trade at is different from the price at which your trade is actually executed. This happens when there are not enough orders to match your trade at an expected price. For a trader, it means less profit.
More Volatility: Even small trades become a volatility concern when there’s low liquidity in the market. With big price swings, traders can make larger gains, but they can also incur bigger losses. At the same time, it makes it more difficult to predict trends and execute complicated trading strategies.
Harder to Enter or Exit Large Positions: Liquidity is essential for executing large trades. If there aren’t enough assets available to make such trades, the price will crash. A similar effect takes place when a particular trader buys a large amount of crypto at once, causing the price to rise by taking too much assets out of the market.
How Leverage Impacts Liquidity in Crypto Exchanges?
Crypto platforms with leverage like the ones found on CCN, allow users to control larger positions with a smaller amount of capital. For instance, if a platform offers 10X the leverage, traders can trade $1000 of crypto assets by depositing just $100. It’s important to note that the process amplifies losses as it does the profits.
Liquidity and leverage are closely related, as when using leverage to increase profits, users also increase their impact on liquidity. In a high-liquidity market, leverage can work well because price movements are usually stable. However, in a low-liquidity market, even a small trade can cause large price swings.
Factors that Impact the Liquidity of a Crypto Exchange
There are several factors that affect crypto exchange liquidity that traders should be aware of. These include:
Trading volume: The first factor to look into is trading volume. Higher volume exchanges are usually more liquid. The biggest exchanges out there, such as Binance and Coinbase, have millions of users every day, and they are usually liquid.
Number of Market Participants: The number of market participants is often the most important factor in keeping the platform liquid. Sometimes, the platforms that operate at a smaller volume but with many individual traders executing small trades are more liquid than the ones operating with billions in assets.
Asset Pairs: Some cryptocurrencies are more liquid than others. Major currencies such as Bitcoin and Ethereum are usually more liquid than the smaller altcoins. Trading in pairs of secure cryptos will provide better results than using smaller altcoins, even though that can have better effects in terms of profit.
How to Choose Crypto Exchanges with Good Liquidity
There are a few factors that the traders should look for that will indicate that an exchange platform has good liquidity.
–Check The Trading Volume. It’s a good indicator that the platform will be liquid, and the metric is easy to follow up on. In most cases, the platforms will provide this data on their own, but there are also sites that review the platforms and track and confirm such data.
–Analyzing Order Book Depth. The order book shows all the current buy and sell orders on an exchange. It’s considered to be deep if there are a lot of orders at different price levels. Few orders or having all orders at the same price level can indicate a problem with liquidity.
-Look for Thigh Spreads. If the difference between the buy and sell prices is small, chances are that the platform will be liquid.
–Liquidity Tracking Tools. There are online tools available that track the liquidity of the crypto exchange itself. These tools are usually paid for via a subscription, so they are an additional expense for a trader but often a valuable one.
Conclusion
In conclusion, liquidity plays a crucial role in the success of crypto trades. A liquid market allows for faster trades, more stable prices, and smaller spreads, which all contribute to a better trading experience. On the other hand, low liquidity can lead to issues like slippage, volatility, and difficulty executing large trades.
When choosing a crypto exchange, it’s important to consider factors like trading volume, the number of market participants, and asset pairs to ensure a smooth trading experience. By focusing on liquidity, traders can minimize risks and increase their chances of success in the crypto market.
