Crypto Exchange Liquidity

The primary advantage of a liquid asset is that it can be easily traded on an open market. This also translates into the fact that similar assets are predominantly traded throughout the globe in a variety of exchanges with consistent prices. However, illiquid assets aren’t typically traded on open markets and are usually exchanged privately — for example, collectables and antiques. So, in essence, illiquid assets are subject to extreme volatility in pricing, which can have a big impact on their margins. In all, an illiquid asset is basically anything that can’t be encashed quickly.

Liquidity plays an instrumental role in tradable commodities or financial instruments such as digital currencies. Low liquidity is an indicator that digital assets are subject to increased price fluctuations and volatility. However, higher market liquidity indicates that the segment is consistent and flexible, with low volatility — which means lower price fluctuations. Therefore, it’s relatively simpler to increase trading volumes in a liquid market as there is a bigger pool of users that can quickly fulfil buy and/or sell orders.

The Significance of Cryptocurrency Liquidity

So, by definition, digital assets have to be extremely liquid, right? Well, that’s not entirely the case. But it’s true that a handful of digital assets can and will have superior cryptocurrency liquidity compared to other crypto assets. And that’s because higher volatility is a direct consequence of increased market efficiencies and the growing volume of trade.

You see, while most markets will be trading in the millions, some will be trading in a couple of thousand dollars. So, it’s safe to say that liquidity may never be an immediate issue for powerful and popular digital currencies such as Ethereum or Bitcoin. However, other types of digital assets may suffer a wide gap in liquidity in their respective markets. This is specifically a fact for buying or selling altcoins. If you manage to invest in a non-liquid coin, it’s going to be extremely difficult for you to get out of the market with a desirable profit. This is why it’s imperative to get started with crypto assets that have substantial liquidity.

Why is a Highly Liquid Crypto Market Extremely Advantageous?

Nothing is more favourable for traders, buyers, and sellers than a highly liquid and flexible crypto market. And the reasons are quite simple. For example, good liquidity ensures better prices for all the participants — the same goes for brokers. Liquidity provides a consistent yet precise balance between profit and risk. Moreover, traders are also able to create a more consistent price range for crypto assets, promoting fair competition and advocacy for secure investments.

Furthermore, a highly liquid crypto market will make sure that the market generates stable prices mitigating the risk of inflated prices for different instruments in relatively short periods. So, as soon as the prices become stable, traders and brokers can quickly fill in bigger orders without risking considerable price hikes. In this scenario, buyers and sellers will be able to effectively execute a larger amount of trades smoothly and lucratively.

Another important advantage of good market liquidity is the added bonus of making precision-based chart evaluations and analyses on the crypto trade market. This is because a more flexible and stable trade environment enables technical software and trading tools to work with extreme precision.

Market Elements that Impact Crypto Liquidity

The Frequency of Trading

One of the most fundamental things that impact liquidity in the cryptocurrency trading stratosphere is increased trading volumes. Most individuals and traders that have invested in digital assets have done so largely to take advantage of capital appreciation and not use their coins as a medium of exchange. Trading volume here basically indicates the number of coins bought and sold on a crypto exchange, typically in a 24-hour window. This activity reflects the frequency of the crypto market of a particular coin — so, in essence, an increased volume will always mean there are more market participants trading their coins.

The Type of Crypto Marketplace or Exchange

A larger amount of digital asset exchanges indicates a bigger market — and larger trading activity as there are a variety of popular platforms that users can explore to trade different types of cryptocurrencies. The boost in both frequency and trading volume play an instrumental role in propelling the overall liquidity of the market. Today, there are more than 200 cryptocurrency exchanges — more are in development and will be launched in the near future. Moreover, there are 21 decentralized exchanges and a couple of P2P (peer-to-peer) marketplaces where you can trade your digital assets.

Crypto Assets — Their Popularity & Demand

The prosperity and feasibility of any digital asset largely rely on the level of demand and acceptance it has generated in a large network of users who see it as a viable asset. That’s mainly why it’s vital for crypto assets to be acknowledged by businesses and individual users as a powerful model of payment to propel the economic utility of crypto assets as a flexible medium for different transactions. There’s no doubt popular digital currencies such as Ethereum and Bitcoin are on the fast track of being accepted as a method of payment — largely in the e-commerce stratosphere. As of now, there are over 370,000 online businesses throughout the world that have added digital coins as a mode of payment. This includes retail and tech giants such as Apple, Amazon, eBay, Microsoft, etc. So, to get started, it’s vital that you consider investing in digital assets that have market viability.

Crypto Regulation Aspects

The regulatory facets of digital assets trading, buying, and selling greatly differ from one jurisdiction to the next. And this is mainly because each country has adopted a different stance and behaviour towards digital assets. While some nations have accepted the crypto stratosphere, encouraging its growth, and also accepting it as the future of trading and transactions, other countries have imposed a complete ban, while some are blissfully ambivalent.

Regardless of the growing prevalence of crypto regulations, there’s no denying that digital assets are continually growing and at an exponential rate. This fact is compelling governments to make their stance absolutely clear to offer individuals, consumers, and traders a fair and mutually beneficial tax plan. As more and more nations are adopting digital currencies, the imminent outcome would be a worldwide acceptance for digital currencies, bigger trading orders, and increased liquidity for crypto markets.

A Look into the Bid-Ask Spread

This is basically a disparity between the highest bid and the lowest ask. It’s easy to see how the liquidity of the cryptocurrency markets can benefit from a low spread. This also translates into the fact that the market is enjoying favourable liquidity because consistent fluctuations in price are adequately being balanced by the buyers and sellers, similar to how trading is done in a forex market. In retrospect, if there’s a considerably large spread, it’s usually an indicator that the crypto financial market is non-liquid. It means that there is a big disparity between how much sellers want to sell and how much buyers want to buy.

Why You Shouldn’t Release a Big Volume in a Non-Liquid Market

The biggest disadvantage of high trading volumes in a non-liquid market is slippage. This is basically the difference between where you’re buying or selling your digital assets and the intended price. Increased slippage indicates that you may get a vastly different price on trading than what you originally anticipated. The reason why this is a typical occurrence is because of a lack of orders in the order book that is anywhere near where you anticipated to trade them. The best way around this problem is limiting your orders — but that in itself presents a conundrum as your order won’t necessarily be filled.

Some Important Factors to Keep in Mind When Selecting a Liquidity Provider

If you want access to a top-notch liquidity provider, you need to analyze and determine exactly what your needs are. Here are some factors to consider before you get started:

Depth of the Crypto Market

This is a vital factor to consider. This essentially illustrates an overview of the level of liquidity of the markets pertaining to a specific cryptocurrency. An increased amount of buy and sell orders at different prices will indicate a high depth of that particular crypto asset in its respective market.

Quicker Trade Executions

The best way to assess the quality of a liquidity provider is to see whether or not it can provide you with quicker, less liquid trade executions. These trade executions must also come with slippage as well as re-quotes, especially when there’s an impact trend or event that could potentially lead to high liquidity.


You should also consider the price a liquidity provider is offering, which must come with competitive spreads accompanied by decreased swaps and commissions that won’t imperil each side. In addition, the liquidity provider’s data feed must always be dependable and offer a decent level of stability. The price feed must average out different prices from a cluster of mainstream crypto exchanges as well as the Forex market — and this should all be done in real-time. If the price feeds and data isn’t available on time (which is usually a matter of seconds), the outcome will translate into inconsistent and intolerable price gaps.

Types of Digital Currencies

Before doing anything, you should first determine what instrument you want to trade. Whenever opting for a cryptocurrency liquidity provider, it’s vital to see whether the provider is offering multi-crypto liquidity, together with historical data and access to Financial Information Exchange (FIX) platform. Moreover, you must also assess if the liquidity provider has the ability to convert your digital currencies back to fiat money and then transform them back into crypto. If so, also look at the provider’s selection criteria of digital assets and tokens that they accept.

State-of-the-Art Fintech

A current and technologically innovative liquidity provider has to integrate cutting-edge FIX tech and protocols as well as a category of other essential technologies such as MT4, APIs, etc.

Final Words

Liquidity plays an instrumental role when analyzing different financial markets, including cryptocurrency. It’s usually more favourable to trade your crypto in markets with high liquidity because you’ll have a better chance of entering and existing trade positions with relative flexibility.

Finarm is a comprehensive financial platform that is accessed by thousands of crypto and Forex brokers all over the world