During the last couple of years, the world has witnessed an increasing activity of companies and financial institutions in the crypto sector. In most cases, they are tech companies, investment banks, hedge funds, and other financial companies that act on behalf of their clients. After the Bitcoin boom in 2021, billions of dollars were poured into the crypto industry. It contributes to the growth of institutional trading of crypto, where liquidity stands as a cornerstone. In this article, we will answer the questions what is crypto liquidity and who is a liquidity provider?
Liquidity in Cryptocurrency
Liquidity is a measure of the number of buyers and sellers for a specific trading pair. The higher this number is, the easier it is to trade assets. Here are some features of liquid and illiquid markets:
- In a liquid market, traders conduct transactions smoothly and quickly, as there is both supply and demand for tokens. In illiquid markets, traders wait long until there is a buyer (seller) for their assets.
- Liquid markets are less volatile than illiquid.
- Liquid markets have higher trading activity and smaller bid-ask spread, compared with illiquid markets.
Who Provides Crypto Institutional Liquidity?
Crypto trading platforms that cannot provide sufficient liquidity to their customers are doomed. Traders avoid trading illiquid markets simply because it’s inefficient, costly, and time-consuming.
The world’s leading crypto platforms like WhiteBIT or Coinbase offer liquid markets for their clients. How do they do it? To ensure sufficient liquidity of cryptocurrency, they partner with institutional investors and high-frequency traders. Large capital influx ensures there are always buyers and sellers for tokens and any order will be fulfilled at any time of the day. In return, liquidity providers (or they are also called market makers) benefit from reduced fees and bid-ask spreads, besides their benefits from trading.
The bid-ask spread is the difference between the biggest price a buyer wants to pay for a token and the lowest price at which a seller is ready to sell it. A liquidity provider takes cuts of this difference.
Wrap Up
The role of liquidity in crypto can’t be underestimated. The lack of liquidity means a lack of supply and demand, high volatility, and spreads. Altogether it means traders churn, which is a collapse for a trading platform. This is why exchanges hire professional market makers and institutional investors to cooperate and maintain a healthy liquidity level for traded assets.
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