Understanding Liquidity Providers

Although a nascent market, crypto finance is a formidable space, and as an investor, liquidity and the role of liquidity providers on exchanges can impact your decisions.

What is Liquidity?

The word ‘liquidity’ is often used in financial markets and refers to the ease with which an asset can be converted into ready cash. In the crypto market, liquidity is the ability of a coin or token to be easily converted into money, or other coins or tokens, without causing a drastic change in the underlying price.

A liquidity provider is an institution that behaves as a market maker in a chosen asset class. To put it simply, a liquidity provider is involved on both sides of the market. They buy and sell an asset at certain prices, essentially ‘making the market’.

Liquidity providers help to promote greater price stability, making the market safer for investors. They do this by taking a significant amount of risk themselves — their profit comes from the spread or by positioning themselves in anticipation of reasonably expected near-term customer demand.

As the world’s first hybrid liquidity aggregator, FINXFLO has ‘skin in the game’ when it comes to liquidity providers. By aggregating with leading exchanges and protocols, FINXFLO facilitates greater liquidity with institutional trading fees and transparency.

In trading, liquidity is extremely important. Low liquidity levels indicate a volatile market, causing spikes in cryptocurrency prices. High liquidity refers to a more stable market with fewer price fluctuations. A highly liquid environment is more conducive to trading, as a larger number of participants will ensure that buy or sell orders can be filled more easily.

Why is liquidity important?

A larger number of buyers and sellers translates to a higher level of activity within the market. This continuous activity is referred to as ‘buoyancy’; a state which creates an improved market price acceptable for all. If prices remain fairly stable, there are fewer fluctuations, and this reduces the risks associated with larger trades. Lower risks can attract more traders, leading to increased activity, and so on.

In a liquid market, prices are better able to withstand large orders because of the larger number of active market participants. Stability in the market also aids more accurate technical analysis as price and charting formation is more developed and precise.

With its smart order routing model, FINXFLO will be among the world’s best sources of trading liquidity, with the ability to deliver its users the best prices in the market. Not only is the hybrid model designed to offer the best prices for CeFi and DeFi protocols, but it also rectifies a number of notable pain points for crypto traders operating on illiquid exchanges, like exchange instability, slow transaction times, and market manipulation. The all-in-one interface gives users options across exchanges to maximise returns.

The primary goal is to provide an innovative solution for users and remove the drawbacks associated with cryptocurrency trading.

What do liquidity providers bring to the table?

One of the biggest indicators of liquidity in the cryptocurrency market is trading volumes. Cryptocurrency market cap rankings websites will usually provide daily volume data which can give you a fair idea of the frequency and volume of trading, indicating levels of market liquidity.

As the crypto ecosystem matures, there is a higher demand for liquidity experts that can offer real value.

This value can be seen in a variety of ways, including:

• Market depth — The depth of a market is measured through the buy and sell orders. The higher the number of orders at each price, the greater the depth of the market.
• Fast execution — In a market where the slightest fluctuations can have a great impact, speed is an essential quality. The ability to execute trades quickly and with minimal slippage, particularly during times of high-impact market activity, is a sign of a good liquidity provider.
• Best pricing — A business model that offers competitive spreads, and low commissions on swaps with no compromise on either side, is an important consideration.

The crypto market is developing at a frenetic pace, and simply” keeping up” can present a tall challenge. As investors, veteran traders, and crypto newcomers feel their way through space, FINXFLO’s intent is on streamlining the process. FINXFLO aims to create an industry-leading platform that enables traders to optimise their investment performance with professional-grade tools through FINXFLO’s user-centric interface.