Introduction

The ease of converting an asset to cash or vice versa without triggering a noticeable change in the market price is what we call crypto liquidity. Liquidity is the most crucial element in a healthy and stable market, and this is more so when there are widespread transactions on the crypto market that have the potential to change a coin’s price in seconds.

For example, you want to buy Ethereum (ETH) for a certain amount. You place your order and suddenly, boom, the price spikes. Or worse, you want to sell a boatload of tokens and don’t have enough buyers, so you end up selling way below the market price. This is yet another area where crypto liquidity is essential.

What is Crypto Liquidity?

Crypto Liquidity is the ability to sell an asset for cash with little impact on the price.

• Good buyers and sellers make it easy in a very liquid market, and if the price changes, it remains stable.
• A lack of liquidity results in fewer participants in the trade, increasing volatility and susceptibility to price manipulation.

What is Liquidity in Crypto? How Does Liquidity Work?

One example would be that you would like to purchase 1 Bitcoin (BTC). The liquidity of an asset such as Bitcoin generally refers to its closeness to potential sale actively on a competitive basis without a significant time to find a buyer. Nevertheless, BTC with low liquidity takes time to sell, as it only holds the price even in unfavorable conditions.

For example:

• Scenario with high liquidity → You sell 1 BTC at $65K, and the buyer instantly buys the BTC.
• Low liquidity case →You list 1 BTC at $65,000, but no buyers offer that price. You sell instead for $63,500.

The price difference caused by this phenomenon, known as slippage, is one-way liquidity affects traders, investors, and institutions.

Why Is Liquidity In Crypto Critical?

Liquidity is neither a high-falutin term nor some magic bullet; it speaks directly to trading efficiency, price stability, and overall market confidence.

1. Reduces Market Volatility

A liquid market has many trades, so a single large transaction does not move prices much. When there is high liquidity, price movements are smooth and predictable.

Low liquidity = sharp spikes/crashes due to single large trades

For example, a highly traded asset (i.e., an asset with a daily trading volume above $20 billion), such as Bitcoin, is more stable than an illiquid small altcoin.

2. Guarantees Equality of Costs & Minimizes Slippage

In a liquid market, buyers and sellers receive good prices with small spreads (the difference between the highest buying price and the lowest selling price).

In situations of low liquidity, the spread tends to widen, making it more expensive for traders and investors.

3. ATOMIC: Attracting Hundreds of Millions in Institutional Investors & Large-Scale Traders

This liquidity is important for hedge funds, institutional investors, and high-net-worth traders, who trade large volumes. A highly liquid market enables them to:

• Market structure: speculators are active.
• Do not swing wildly in price.
• Reduce transaction risks

A lack of liquidity prevents institutional actors from investing in an asset and limits that asset's growth.

4. Improves Market Efficiency & Speed of Trade

In a liquid market, orders are filled quickly at expected prices. For traders, this means:

• Faster order execution
• Reduced waiting period for transactions
• More confident in accurate price

Conversely, low liquidity or thin markets result in unwanted delays in order execution and poor price action, which irritate traders.

Factors Influencing Crypto Liquidity

There are many factors affecting the liquidity levels of a cryptocurrency.

Maximum Offer & Market Movement

This makes a cryptocurrency more liquid, and the more it is traded. Bitcoin and Ethereum most likely get the largest share of trading volume, so they're much easier to buy or sell than competing and lesser-known altcoins.

A high 24-hour trading volume indicates a healthy and active market where traders can make trades at fair prices.

Number of Listed Exchanges

Cryptos listed on several reputable exchanges will generally have better liquidity than coins listed only on one or two platforms.

For example:

• BTC is listed on nearly every exchange → High liquidity
• A recently launched token that is listed on one exchange only → Low liquidity

This is why projects work with Cequire’s crypto market-making services to achieve a healthy distribution of tokens and deep liquidity.

Market Making Activities

Market makers are important in providing liquidity. Cequire, a crypto market-making firm, helps place consistent buy and sell orders, improves bid-ask spreads, and provides constant trading activity. This ensures that price spikes or crashes are gradual rather than sudden, contributing to a more stable overall market.

Utilization & Adoption of the Cryptocurrency

Cryptocurrency liquidity measures how easily an asset can be bought or sold without considerable effect on its price. This additionally infers that price changes are less inclined to be furious and that the market will be more stable. Real-World Use Cases: Cryptos with real-world applications (like trading pairs, payments, and DeFi) generally enjoy higher liquidity, while niche tokens with limited applications often face low liquidity.

For example, USDT and USDC are widely used for payments and trading, so they possess very high liquidity on order books. If there is not much need or interest in your digital token for gaming, people will be unable to trade it universally, so you will get low liquidity because nobody is going to invest in it per se.

Regulatory Confidence & Market Confidence

Investor confidence, on the other hand, can be affected by regulation, which significantly impacts the liquidity of cryptocurrencies. Well-structured and supportive regulations of digital asset markets can attract institutional investors, leading to greater participation and liquidity. Alternatively, unclear or stringent regulations can scare investors off and dry up liquidity.

In 2021, for instance, China announced a ban on crypto trading, which led to liquidity plummeting, as users up and left exchanges with low trading volumes. On the contrary, jurisdictions like Switzerland or Singapore that provide regulatory clarity have attracted institutional investments, creating a more stable market.

How is Cequire contributing to better crypto liquidity?

You have an indefinite period to mount achievements.

Let’s take a look at how Cequire’s crypto market-making services enhance liquidity:

• Deep order book support: Guarantees constant demand for buy and sell orders.
• Tighter bid-ask spreads: Decreases price manipulation & slippage.
• Liquidity in the secondary market: Enables institutional investors to trade in size.
• Multi-exchange integration: Guarantees tokens have liquidity on various platforms.
• Risk management strategies: Protects from market shocks and sudden liquidity crises.

Through collaboration with Cequire, projects, and exchanges can provide a steady supply of liquidity, draw in investors, and contribute to the market's long-term stability.

Final Thoughts

Lack of liquidity is a recipe for disaster in any asset class, including crypto. It leads to inefficiencies in trade, rampant price fluctuations, and a loss of investor confidence.

Cequire is a crypto ecosystem market maker. The crypto industry has become a crucial player, aiding in liquidity provision to the market, price stabilization, and incentivizing investors.

Cequire is a leader in building crypto market-making services tailored to the needs of crypto exchanges, token issuers, and institutional investors requiring a liquid and efficient trading environment.

Want to optimize your crypto project liquidity? Partner with Cequire today