How does crypto exchange liquidity work? Why is high liquidity so important to exchanges? Since the advent of Bitcoin, a cryptocurrency has undergone many changes. The market is maturing at an unprecedented rate, and liquidity is becoming the new star of this show.

Fight against counterfeits

At the beginning of 2019, Bitwise, a cryptocurrency asset management company, studied the daily trading volume of cryptocurrencies. That shows the data of the US Securities and Exchange Commission. Surprisingly, the company suspected that 56 companies had forged sales.

Subsequently, Bitwise filed a huge accusation against CoinMarketCap. According to the report, 95% of the transactions generated and disseminated by CMC are false.

How to maintain market transparency?

This is why liquidity has become a new matrix. Just recently, the computer media communication announced that soon, liquidity will become the default indicator of cryptocurrency pair and exchange ranking. Let's start with the basics and try to understand why liquidity is so important.

What does liquidity mean?

Passwords borrow the terminology of traditional trading markets. Liquid assets are assets that you can easily buy and sell (and get cash) without affecting their market prices. This is because cash is considered the most liquid asset.

Another very important thing is that liquidity helps to measure whether the market is ready for an asset and whether there is a demand for such an asset. However, before we proceed, it is important to understand two key aspects of liquidity:

Liquidity market

A market full of active traders is called a liquidity market. In a highly liquid market, the difference between buying and selling prices is very small.

current assets

Assets that can be bought and sold quickly in any market are called current assets. Liquidity cryptocurrency is a currency that can be easily converted into cash or other crypto assets.

What determines liquidity?

Trade volume

The volume of trade plays a major role. Once we have determined the true number, it is easier to measure the liquidity of an asset. Therefore, 24-hour trading volume plays a crucial role in determining the interest of the buyer and seller in the specific asset. Higher trading volumes indicate higher liquidity.

Password exchange

The liquidity of an exchange is determined by the following important factors:

1. Whether the main cryptocurrencies are supported;

2. If it provides multiple encryption pair encryption transaction pairs;

3. Is there a slope from Fiat to crypto?

Exchanges that allow customers to select will naturally attract more trading activities. In turn, more traders mean better price differentials, less market volatility, and fairer pricing. For example, the EcXX Exchange in Singapore attaches great importance to maintaining high liquidity. By listing high-quality projects, EcXX seems to have done a good job in ensuring liquidity.

But there is another aspect. This is about security. After all, we have witnessed too many hacker attacks in the past few years. However, EcXX seems to be setting a positive example. It is the first Asian exchange with integrated ledger library for refrigeration, which ensures the high-end security of assets and has multiple authorization functions.

Asset availability or value

When accepted by a large number of traders and investors, any currency becomes more liquid. This is especially true if there is appropriate project support.

Therefore, in order to maintain higher liquidity, it is becoming more and more important for the exchange to list projects and assets that will be more attractive. Bitcoin is a good example. Almost every exchange listed Bitcoin because of its high demand.

In addition, the exchange provides trading fee discounts to attract more traders, thus increasing the liquidity pool.

Why is high liquidity so important to exchanges?

Now that we have explained what liquidity is and the factors that determine it, it is time to understand its importance. In essence, this is related to fair pricing.

Time and again, traditional markets have proved that liquidity markets better reflect asset prices. In other words, it is more difficult for price manipulators to take various measures. This fact is very important if we want to create a price equilibrium.

In a word, a fairer market is less vulnerable to sudden price fluctuations, and the buying and selling duration is shorter. Many of us know that the cryptocurrency market is very volatile. In other words, it certainly needs the support of the exchange and other parts of the ecosystem to fight against volatility. This is what the liquidity matrix brings.