What is Liquidity? How can I improve my crypto exchange Liquidity? (Detail Guide)

Being derived from the French word “liquidette”, Liquidity is one of the most used economical terms. But why it is called liquid? And Why in monetary terms? It is because of the “flow” and “conversion”. Water or any other fluids flow freely irrespective of the shape of the material that they flow in, right. That is what the money does. Fiat flows freely, irrespective of the kind of financial or economical breakdown or uprising.

As the water has certain restrictions in their flow like dams and reservoirs, Money, too, has certain restrictions from the central authority if it is getting converted from asset to cash. Based on those conditions, the flow of money is decided. So, in layman terms, we can know that liquidity is determined by the flow of currency and the level of restrictions that they are accustomed to.

What actually is Liquidity?

Economically speaking, Liquidity is the flow and conversion of an asset or currency in the economical arena. In the finance sector liquidity play a crucial role in the distribution of finances. Be it an individual or an entrepreneur, liquidity is one of the prime movers in any financial activity. Except for those financial people and some economical entrepreneurs, there is very little chance that others know about the significance of liquidity.

In this blog, let us know about the significance of liquidity, restricting factors, crypto liquidity, and how to improve crypto liquidity.

Why Liquidity is needed?

In this era of the competitive finance industry, it is liquidity which stands out as a distinguishing feature. Liquidity was not needed when the barter system prevailed. But we do need it now. Yes, suppose, you need to transfer your asset into fiat, what will you do? There are many options — You visit a bank and change your asset into fiat. But you need to pay interest which is a different story. Another easy option is to sell the asset for more profit to a real estate owner or a dealer. That is the second option.

But which is fast? We know that the second one is the most faster. That does not mean that we all should go find a real estate owner to transfer an asset into cash. But based on liquidity, Banks take a pretty more amount of time than the commercial businesses to settle the money and that is where the liquidity sprouts in.

But the properties’ liquidity differs from one to another. If they are easily flowable assets like Bonds, Mutual funds or commodities, or even foreign exchanges, there are greater chances that they can get changed easily. But some not-easily flowable or non-liquid assets like real estate, art, and other precious items would take a long time.

Significance of liquidity:

Liquidity has certain significance:

  1. Quick transactions — That is the reason why the cryptocurrency is running successfully. In the general sense, liquidity helps the transactions to get conducted real quick and efficient. People love to make quicker transactions than slower transactions.
  2. Stable markets — if you want a stable market and a competitive economy, then you should have liquidity in your business. A business without liquidity is rigid in transactions as they do not have any choice. Also, the markets will be stable only if the liquidity retains the entire economy.
  3. Fair price levels — If you want to exchange your fiat or your asset, you should nearly feel the significance of crypto liquidity. Yes, there are no commission fees or any other hidden expenses that you should pay them while exchanging. Another fact is that the banks will deduct some only into their products so that the prices look vertical and aligned.
  4. Analysis and strategy — It is because of the proper strategy and analysis, the liquidity of the fit is more effective and exceptional.

There are several other factors why we need liquidity for conducting business. But why it leads to specific importance with the cryptocurrency? How does it entered into the minds of the cryptocurrency exchange software development sector and drove them so crazy? Let us discuss:

Despite this liquidity significance for fiat, there are certain reasons and restrictions that instigated the population to come up with a new big idea to overcome those restrictions. That is where the cryptocurrency came into the picture. Cryptocurrency exchanges generally have a high liquidity ratio comparing to fiat exchanges. The main reason behind this is the elimination of regulation and conducted online through secured technology — “The Blockchain technology.”

Crypto Exchange liquidity — A savior:

Crypto exchanges operate millions and millions of transactions within a minute without any technical hassles and store them in the ledger. In that way, we can measure their liquidity effect. Crypto exchanges conduct their liquidity on three forms or levels. They include

  1. Asset liquidity.
  2. Exchange liquidity.
  3. Market liquidity.

Each one of them has a specific function in which the crypto exchanges conduct the transactions in an efficient way.

  • Asset liquidity is the transaction that is conducted between the buyer and the seller for a particular asset in the exchange platform. The maximum the liquidity of the cryptocurrency platform, the quicker the asset gets transferred. Cryptocurrency exchange platforms focus on improving their asset liquidity through tokenization like Asset tokenization, etc.
  • Exchange liquidity is the conversion of one currency to another currency or coin and vice versa. It is a known fact that cryptocurrency exchange platforms conduct exchange operations more effectively than banking organizations. Only those coins and currency trading pairs that are listed are exchanged real quick on the platform.
  • Market liquidity is nothing but the assessment of the health of the above-discussed liquidity markets that conducts its operations. Liquid markets are highly competitive they are smoother and efficient to deal with all the transactions. The market base in the liquid markets will be always higher than in an illiquid market.

So, we can know that liquidity plays a greater role in the success of any cryptocurrency exchange. Many cryptocurrency exchange platforms like Binance, Coinbase achieved their success due to their high liquidity.

A question arises, “Then how can I develop or improve high liquidity for my cryptocurrency exchange platform?”

How to improve my cryptocurrency exchange liquidity?

If you are a holder or owner of a cryptocurrency exchange platform, then your succession to the crypto business depends upon the liquidity you provide to your customers. You can boost them using certain techniques:

  1. Liberating KYC norms — With a gradual liberation of KYC norms, and facilitating the customers to start trade immediately without any time delay, then it is one such effective strategy to improve your business.
  2. Using updated technology tools — Use updated technology tools to run your exchange platform. This will make your user feel cozy while operating the trade and further it enhances the liquidity of the transaction.
  3. Choosing the best cryptocurrency exchange liquidity providers — You can choose the best crypto exchange liquidity provider to improve the liquidity of your exchange site. But you should know about the qualities to choose the best one. Some of the best qualities include — Trustworthiness, work experience, and communication.

Wrapping it up:

Creating a cryptocurrency exchange is one such magnanimous task. But you should increase the liquidity of such a website to generate more profit from the business. From the above-discussed ideas, you can make sure that liquidity plays a greater role in the crypto business and how to improve crypto exchange liquidity.

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