Digital asset liquidity is one of the key indicators that helps a crypto trader decide whether to buy or sell it at the market price. The more liquid the asset is, the higher the supply and demand for it are. It causes a price change. Crypto exchange liquidity defines how quickly and easily a chosen digital asset can be bought or sold at a stable price with minimal delays and losses. In other words, the sooner you buy or sell digital assets at a reasonable price, the more liquid a cryptocurrency exchange is.
Any cryptocurrency exchange, trading platform, or crypto swap service must provide its clients with a high level of liquidity for the offered assets to make a profitable trade. Traders prefer exchanges with liquidity. The trading positions have to be opened instantly and without delay, even in large volumes. However, what should the exchange do when supply and demand are at a minimum, and a price is at a standstill? In this case, liquidity is supported by market makers.
Crypto market making means providing liquidity on a defined cryptocurrency by submitting both BID and ASK limit orders on a crypto exchange. Market makers provide cryptocurrency exchanges with greater liquidity and full order books to improve trading execution and make the platforms more attractive to users.
To organize the trading activity, market makers submit two types of orders:
- transactions meant to execute immediately at the currently available market price;
- orders to buy (or sell) digital assets at a specific price.
They do this by placing passive “limit orders” into the order book of exchanges on both buy and sell sides, offering the liquidity that bridges the gap between sellers and buyers. The more orders there are in the order book for a specific digital asset, the more liquid it is.
At the same time, market makers play a special role for startups in the cryptocurrency market because many tokens do not initially have enough popularity in the crypto community to acquire good liquidity. Therefore, many investors seeing an opportunity in a token or cryptocurrency can’t instantly open a large volume trading position. Cryptocurrency market providers create the necessary trading volume, offering sufficient quantities of these tokens, helping investors buy not the most popular and liquid yet, but promising tokens. In this way, they protect the market from manipulations.