Liquidity Problem of Cryptocurrency Market, Factors Affecting Liquidity

Bitcoin Crypto Liquidity Providers Comparison

Liquidity is an important parameter of an asset that allows one to know how quickly it can be realized at its market price. For example, money is considered to be the most liquid, because with it you can purchase goods at any time and at the current market value. What about cryptocurrencies?

What is a Liquidity Provider in Cryptocurrency?

Cryptocurrency liquidity is a parameter by which it is possible to determine the effect of purchase and sale transactions on its market value. Assets with low liquidity tend to suffer from frequent price changes. The higher this indicator, the less volatile the cryptocurrency. 

To put it another way, cryptocurrency liquidity can also be considered a measure by which one can judge the popularity of virtual coins on the exchange (as it can indicate the volume of transactions), as well as the possibility of their use for the sale of goods and services. Liquidity is also useful in trading, as its level lets one judge the number of operation applications for that coin.

Liquidity Problem on Cryptocurrency Market

For many traders, 2014 was marked by the Mt.Gox problems. The trading platform was hacked, stopped working, and then the official website completely disappeared. The administration of the exchange platform blamed the attackers and the current malfunctions. Unable to solve the problem, the company declared bankruptcy. The total amount of lost Bitcoins exceeded 700 thousand. During such unforeseeable extreme situations, all virtual coins lose their liquidity due to the closure or temporary cessation of activities by the exchange platforms.

The importance of cryptocurrency liquidity cannot be understated. The confidence of the participants of the virtual network (potential and existing investors) depends on this indicator. When it’s high, investments flow in, technology is improved, trading turnover and the exchange rate both grow. This is why, before investing, crypto network participants always evaluate the liquidity of virtual coins to try and draw the conclusion of whether they are worth investing in.

Cryptocurrencies with low liquidity are poorly protected from speculation. They are often victims of concepts such as pumping and dumping. When the virtual currency has a small turnover, it is easier for attackers to influence the exchange rate by selling or buying a large number of coins. If a large volume of the cryptocurrency is suddenly sold, its price falls. Attackers take advantage of this and buy up coins, and then sell after the prices rise again, making a profit off of the difference.

Factors Affecting Liquidity

When determining the liquidity of virtual coins, it is important to consider the factors affecting it:

Possibility of exchange. When the coin is added to an exchange platform, its liquidity rises. The more platforms it is available at, the higher the turnover and liquidity. New cryptocurrencies often have low liquidity due to the fact that they have not been added to the exchanges’ listings yet (or are not traded at all).

Digital coins acceptance. Another factor is the number of outlets that accept the cryptocurrency in question. The more actively coins are used by companies, shops, real estate agencies, travel agencies, and other structures, the greater the turnover – and liquidity. For example, using Bitcoin, you can book a hotel room, buy goods in numerous online stores, exchange assets on the exchange. The more opportunities there are for using coins, the more honest their price and higher liquidity

Regulation. An important aspect determining liquidity is the attitude of government agencies to cryptocurrency, both in general and towards that particular one. Usually, states develop a common strategy in relation to virtual coins. Still, however, there are two main attitudes amongst countries. On one hand, in Australia, Belarus, Germany, Japan, and other countries, virtual coins are allowed. One the other hand China, South Korea, and others are at a crossroads and cannot make a final decision yet: to ban or to allow.

The existing disagreements so far haven’t affected the liquidity of a number of cryptocurrencies, for example, Bitcoin or Ethereum. This is subject to change if one of the above countries outright prohibits the circulation of virtual coins and mining. In that case, the situation will change dramatically. The exchange rate, capitalization, trading turnover will all decrease, and after them, so will the liquidity of virtual coins. On the contrary, with the emergence of a clear position on the part of the authorities, the popularity of coins among the masses increases

Public awareness. The more people know about cryptocurrencies and their capabilities, the higher the turnover and liquidity. For example, until 2017, many did not consider Bitcoin as a serious investment. However, after the sharp increase in the exchange rate (during the year it increased from $1,000 to $20,000), the situation changed.

Many individuals and companies became interested in Bitcoin and began to use it as an investment asset. When a crypto coin just appears, only cryptocurrency enthusiasts know about it. As a result, liquidity is low. At the same time, any large transactions with a new cryptocurrency can affect its value. The more people find out about the new coin, and the more transactions it is used in, the higher the liquidity.

Price, capitalization and daily turnover. These indicators are interconnected. They can help you calculate the estimated liquidity of a virtual coin. A high rate and a high 24-hour turnover indirectly show how in-demand the coin is. If you draw a comparison with past measurements, you can trace the current trends and draw conclusions about the coin’s future.

Cards. One of the most important factors is the relationship of virtual currency with the banking sector. Today, there are cards that can be used to cash out crypto at ATMs. Bitcoin has the most opportunities to do this. Among the popular debit cards, Wirex, CoinsBank, CryptoPay, and others are worth highlighting.

How to Measure Liquidity?

In financial analysis, there is a term liquidity ratio, which measures the ability of an enterprise to cope with existing obligations (debts) with the working capital they have. This definition does not apply to cryptocurrency, and there is no exact formula to calculate its liquidity.

Generally speaking, liquidity is an indicator that reflects the prevalence of the agreed asset price, as well as the willingness of market participants to carry out transactions with it. The main criterion is the volume of trading transactions completed over a certain period. As a rule, this parameter is calculated using 24 hours worth of data, but sometimes it is measured over monthly or weekly periods.

To determine how in-demand a coin is, we divide its trading volume per day by its cost. Let’s take Bitcoin as an example. Bitcoin’s 24-hour trading volume is $16,602,990,674; the price of one coin is equal to $7,316 (all figures were recorded at the time of writing this article).

This means that over the past day, BTC turnover was more than 200 thousand Bitcoins. This number indicates increased activity for the coin and the presence of a large number of sellers and buyers.

Cryptocurrency Exchanges

The following list shows you Top-5 cryptocurrency exchanges, ranked by their liquidity index. 

#1. HitBTC


HitBTC is one of the largest cryptocurrency trading exchanges. Since 2013, HitBTC has been providing a trading platform for Bitcoin, Ethereum, Litecoin, Dogecoin, Monero, USDT, more than 300 cryptocurrencies in total.

  • Daily trading volume: $1,030,331,287
  • The most popular pairs:
Pair24-H trading volume

#2. Bitfinex


Bitfinex was launched in 2012 and quickly became one of the largest cryptocurrency exchanges in the field. In time, the platform began to provide access to P2P financing, an OTC market, and margin trading. Now, Bitfinex is one of the main to-go liquidity providers on the market.

  • Daily trading volume: $150,012,099
  • The most popular pairs: 
Pair24-H trading volume

#3. Binance


Binance is a Chinese cryptocurrency exchange, founded in 2017. It is one of the most popular crypto exchanges in the world with 6 million active accounts. 

  •  Daily trading volume: $5,490,022,289
  • The most popular pairs:
Pair24-H trading volume

#4. Huobi Global


Huobi Global is a leading cryptocurrency exchange with a wide range of digital assets. It has its own exchange token, called Huobi Token, which you can trade on various exchanges like Huobi Global, HADAX and Bibox.

  • Daily trading volume: $1,563,564,948
  • The most popular pairs:
Pair24-H trading volume

#5. Kraken


Launched in 2011, Kraken stood among the pioneers of crypto exchange. Since then, it became a trading platform, supporting margin trading and primary dealing in Bitcoin and Ethereum.

  •  Daily trading volume: $271,768,375
  • The most popular pairs:
Pair24-H trading volume

Bitcoin & Crypto-to-Crypto Exchanges

Here are the Top-4 crypto-to-crypto instant exchanges. Some of them also offer exchange using fiat currencies. 

#1. Changelly


Changelly allows you to buy cryptocurrency instantly and without personal verification. It is one of the best exchanges as it lets users swap cryptocurrency for fiat at the best rate. Changelly also has low transaction fees. In fact, you can buy BTC right now through our calculator!

[add-changelly-widget from=usd to=btc]

#2. Coinmama


Coinmama is one of the world-leading exchanges, that was founded back in 2013. It provides a user-friendly service that allows users to purchase cryptocurrency for fiat money and by swapping them with other cryptos. Coinmama charges a 5% fee.

#3. Coinbase


As one of the biggest crypto exchanges on the market, Coinbase provides instant crypto transactions for both crypto coins and fiat money. Since its foundation in 2012, Coinbase was among the best exchange platforms in the field and remains one of them still. Currently, Coinbase charges fees from 1.50% to 4%, depending on the payment method used. 

#4. LocalBitcoins


LocalBitcoins is a Helsinki-based peer-to-peer exchange that started in 2012. Here, the exchange is acting as a platform where users trade amongst themselves. Due to the nature of the transactions on the exchange, there is a resolution and feedback system. Given that, there are no fees for trading except for those who use advertisements, they pay a 1% fee.

Bottom Line

Bitcoin liquidity providers always act on the market, both buyers and sellers. As they make the market, they have the responsibility to ensure price stability and high trading volumes, as well as help new investors reduce risks. 

Cryptocurrencies are exclusively digital assets and all transactions go through the network. But contact with the liquidity provider should always be at the highest level. This is not only about e-mail but also about telephone communications. The provider should be able to answer any questions 24/7.

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