Liquidity is one of the important criteria and is the key to a brokerage’s long term and a cryptocurrency exchange success. In other words, liquidity in cryptocurrency exchanges plays a significant role.
Liquidity in cryptocurrency exchanges; traders may leave the platform due to low liquidity
In fact, liquidity refers to how easily a trader is able to exchange one asset for another on a platform. If a trader opens a position in order to buy or sell an asset, but the platform cannot respond to the request, then the platform is struggling with low liquidity. As a result, the trader may choose and move to another platform, which has a higher liquidity. In fact, traders are looking for a platform which responds quickly to their requests. Because when you are trading cryptocurrency, the time really matters and it can affect the profit. The reason is that cryptocurrency price is highly volatile.
Platform, which could provide enough liquidity and more competitive market pricing, will attract more traders. If traders met their needs, they remain on the same platform and execute all their trades on it. As a result, they give more liquidity to other traders as well.
The effect of liquidity on the price
Liquidity also affects the price of an asset on an exchange. When traders start to trade large number of an asset, a large portion of that asset will eat up by a single transaction. So, it’s important that the exchange has enough amounts of that asset. Otherwise, the price will increase on the platform due to lack of having enough liquidity.
In addition, high liquidity makes the transactions faster. Consequently, the traders will be happier and will stay loyal to the platform.
Although making high liquidity is a challenge for young crypto platform, they have many options to get help from. There are three different options, which exchanges can use. These options consist of third-party market makers, liquidity mining and cross-exchange market making.
Anyway, different liquidity solutions can result in different amounts of operational capacity and capital. So, there is no one choice, which can fit all strategies.