Beginner's Guide | Why choose a highly liquid exchange?

Source: Medium

Translation: First Class (First.VIP)

Liquidity is the most important concept that everyone needs to understand when trading or investing in cryptocurrencies. For many years, liquidity has been the focus of cryptocurrency exchanges. But what does this mean? Why is high mobility so important?

What is liquidity?

Liquidity of assets

Liquidity is the degree to which a particular asset can be quickly purchased or sold without affecting the overall stability of its price.

In the simplest terms, liquidity refers to the ability of an asset to convert into cash.

The most liquid asset available is cash because it is very stable, easy to access, and can be easily used to buy, sell, repay debt or meet immediate needs. Therefore, cash is often used as a measure of asset liquidity.

What is common to liquid assets is that they all have an open market that can be traded at any time. This means that these assets are traded in large numbers on different exchanges around the world at a stable price. For assets that are not liquid or liquid, they are usually not traded on public exchanges. The most common means of trading is private trading. This means that the prices of illiquid assets can vary widely and can take a significant amount of time to complete.

In essence, the harder it is to realize an asset, the worse its liquidity.

Cryptographic currency exchange liquidity

The liquidity of a cryptocurrency exchange means that traders can easily exchange encrypted assets with another person. In transactions where cryptocurrency is exchanged for fiat currency, high liquidity means that traders can easily buy and sell cryptographic assets in French dollars and other legal currencies, and the time required for the transaction is very short.

In transactions where cryptocurrency is converted to cryptocurrency, high liquidity means you can easily convert cryptocurrencies into stable currencies such as Bitcoin, Ethereum or USDT.

Why is liquidity so important?

The highly liquid trade has all of the following advantages:

1. Highly liquid exchanges provide traders with a fairer price

(First class note: refers to the difference between the bid and offer price.)

With a large number of buyers and sellers, the price of encrypted assets is more fair to traders.

An active, highly traded market ensures that sellers sell at competitive prices, while buyers bid at a higher price, creating a fair and balanced market price for everyone. A stable price is a sign of market stability, ensuring that traders are not at a disadvantage.

2. Liquidity helps the market to stabilize

High liquidity ensures price stability and does not cause large market volatility due to block trades. In markets with poor liquidity and low market activity, whales (Da Zhuangjia) can easily have a significant impact on prices. A single buy or sell order will result in large fluctuations in the price of the cryptocurrency, which will exacerbate volatility and risk in the general market. If a transaction has many participants and orders, the price is stable enough to withstand a large number of orders.

3. High liquidity is good for short-term trading

It is more convenient and easier to buy and sell cryptocurrencies in a highly liquid exchange, because many of your buying and selling orders can be filled because there are more buyers and sellers.

4. High liquidity improves the accuracy of technical analysis

Technical analysis (TA) refers to predicting future prices based on historical transactions, historical prices, and the use of technical indicators and chart patterns. TA is a widely used method for understanding general markets and transactions. With high liquidity, it means that the more trading samples, the more credible the analysis results.

What are the indicators for determining the liquidity of an exchange?

Buy and sell quote spread

The exchange's order contains the bid information for the sale and purchase and the quantity purchased, which is the more accurate information in the data provided by the exchange. The process of closing a bill and paying a bill is the process of generating a balanced price. The bid-ask spread is the spread between the highest and lowest bids in the order. The smaller the spread, the higher the liquidity of the market (exchange) and the higher the turnover rate.

2. Trading depth

Transaction depth refers to the quantity of orders in a specified price range within a specific time period, usually considering the amount of order clearance of 1% of the price above and below the equilibrium price. The deeper the depth, the greater the amount of orders that the market can carry, the higher the stability of the price, the lower the risk of manipulation, and the higher the market liquidity.

3. Volume

The total amount of all historical transactions is the total volume of the exchange, and the completed order will be the actual transaction price and the number of transactions in the transaction history. In a certain period of time, the higher the turnover, the higher the transaction speed and the volume of the transaction, and the better the liquidity of the exchange.

4. Transaction fee

Transaction processing rates are also an important indicator of liquidity. Exchanges need to be reasonably priced to seek a balance between revenue and liquidity. In general, transaction transaction rates are low and transaction costs are reduced. The more users on the exchange, the greater the liquidity of the transaction.

The liquidity of the exchange depends on those participants. The increase in trading activity ensures that the seller sells at a competitive price, and the buyer bids at a higher price, creating a relatively stable balance. In a low-volume exchange, there are fewer participants in the transaction, so it takes more time between placing an order and executing the order after finding the buyer or seller. During this time, the price of the asset may change (the price of the cryptocurrency is highly volatile), causing your order price to not match the current market price.

to sum up

For traders, choosing a highly liquid exchange can reduce the impact of the market by Dazhuang to a certain extent; get a more favorable price; in an emergency, you can trade quickly.

The translator has partially modified the original text so that the reader can better understand it. Please reprint the copyright information, thank you for reading.