The Solidity Of Liquidity’s Relevance in Cryptocurrency Exchange
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The Solidity Of Liquidity’s Relevance in Cryptocurrency Exchange
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You know you're a grown-up when the word "liquid" moves from physics and chemistry to finance and investing. Liquidity finds parallel signals in any investment opportunity. As cryptocurrencies slowly transform themselves into viable investment platform, it is important to understand the importance of liquidity and liquidity in the cryptocurrency market. It goes without saying that liquidity is paramount when it comes to the development process of a cryptocurrency exchange.
What is liquidity?
Before understanding why liquidity is so important in the cryptocurrency 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 another type of currency. Since cash is the instrument of transaction which is easily available and easy to spend, cash is the de facto criterion for obtaining liquidity of an asset.
Based on the amount of liquidity, assets can be divided into liquid and illiquid assets, although there may be no clear line separating them. The common feature you can find in all liquid assets is that they all have a ready and open market for trading. While illiquid assets are traded privately, most liquid assets are traded on public exchanges.
To sum it all, the more difficult the asset is to redeem, the less liquid the asset will be.
Why is liquidity important?
In the context of cryptocurrencies, liquidity refers to the possibility of converting a coin into cash or other coins. Liquidity brings with it many advantages
Price fairness
In a liquid market, prices must be fair and equal for all market participants. One of the most important factors contributing to the fairness of the price is the number of buyers and sellers. A market with high trading activity will ensure or force sellers to sell at competitive prices and buyers will naturally bid at higher prices. This strikes a balance that was considered fair to all parties involved. The stability of this equilibrium is one of the biggest indicators of market stability. The most direct effect of market stability is pricing equities.
Market stability
High liquidity ensures that the market will suffer from price fluctuations due to large trades. There have been cases where the prices of non-liquid assets have been radically changed and even manipulated due to big players in the market where there is not much activity. Since liquidity increases the number of investors, even large deals will not affect stability and prices.
Fast transaction
When investing in the market is said to be something simple, it basically has to be fast! It is convenient to buy or sell the cryptocurrency of your choice in a liquid market, where orders will be executed quickly due to relatively healthy demand and supply. This characteristic has given rise to short-term trading where you can enter and exit a trade quickly.
Data volume for technical analysis
Technical analysis of cryptocurrency past prices and chart patterns is likely to be a harbinger of big data. While there may be arguments for or against technical analysis, it is still one of the most popular methods of predicting the price and scenario of value with cryptocurrencies. Anyone who deals with big data will point out that the larger the data, the more accurate the prediction, and it is this liquidity that allows large amounts of data to be used for technical analysis.
Trading volume
Many users who buy cryptocurrency do so for investment and trading, rather than using it as a medium of transaction. Volume, in relation to cryptocurrency trading, usually refers to the number of coins generated in the last 24 hours. The higher the volume of a particular currency, the greater the activity and liquidity.
Cryptocurrency exchange
An exchange is a market in which assets are traded between buyers and sellers. If a particular currency is accepted by a wide range of markets, it means that the particular cryptocurrency is highly liquid. An increase in the number of exchanges also leads to an increase in frequency and volume, the benefits of which we saw earlier. There are over 200 cryptocurrency exchanges, ten of which are decentralized.
Accept
The acceptance of the coin by the public is based on the reliability, volume, and acceptance of the cryptocurrency by the exchange. This is important not only for cryptocurrencies to be accepted by traders as well so that it can result in better reliability and liquidity. One of the best examples of accepted cryptocurrency could be none other than Bitcoin, the great father of cryptocurrency. Bitcoin is accepted as a transaction tool by some global companies such as Amazon, Apple, Microsoft, and PayPal.
Regulations
This is one of the very few aspects where authorities should step in. Laws and regulations in different countries directly affect the liquidity of cryptocurrencies. There are some countries that have shown resistance to cryptocurrency trading and these practices will undermine the liquidity of a particular cryptocurrency in that geographic region. While decentralization can help in this regard, there is also a high potential for fraud and price hikes.
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