Understanding how liquidity works is important for proficient traders, and finding a reliable provider becomes challenging in light of the ever-changing markets and the dynamics of the financial industry.
Liquidity affects how trades are executed, determining the transaction speed, the spread, the price slippage, and the overall market efficiency. Thus, the industry is paying more attention to liquidity patterns and providing large market access.
Providing liquidity in the crypto market becomes debatable due to the high volatility of virtual currencies, which makes liquidity vital to stabilise the prices against the massive fluctuations happening with cryptocurrencies. Let’s discuss how liquidity providers work and how you can find a reliable one.
Introducing: Crypto Liquidity Providers
Crypto liquidity is the availability of virtual currencies in a specific market, exchange or brokerage, which makes buying and selling cryptos easier and faster, with minimum loading times.
Liquidity providers are large financial corporations and banks who significantly trade in the market, making assets available and taking the counterparty position to execute pending buy and sell orders.
Crypto liquidity providers use aggregation to give access to a larger order book, where many pending orders are waiting to be matched and processed. Thus, they increase the chances of finding a matching requested order to execute the trade much faster.
This way, they assist decentralised exchanges in order execution and increasing their pool of crypto coins and tokens, allowing them to provide more tradable assets to their end users.
In exchange, crypto LPs charge fees for their service and setup. However, the high demand for cryptocurrencies and the commissions a DEX platform would charge can definitely cover the liquidity fees and enable the exchange to land substantial profits.
Why Use a Crypto Liquidity Provider
The crypto market is a highly speculative one, where public opinion and social media posts can highly drive market sentiment and traders’ decisions. This can create unpredictable patterns and drive prices uncontrollably.
Therefore, the need for high liquidity arises to combat this changing pattern in demand by increasing the supply of coins and tokens. High liquidity crypto markets enjoy relative price stability compared to low liquidity, which makes order execution a lengthy process with larger spread and slippage rates.
By increasing the supply levels of cryptocurrencies, the difference between bidding and asking prices, called the spread, decreases. Lower spread ranges result in lower commission fees, which makes transactions more affordable.
Moreover, when there is a huge number of pending trades in the order book, the chances become higher for a new market order to find a suitable match and be processed faster. This decreases the chances of price slippage, which means executing the trade at a slightly different price because of the waiting time, which can extend to a few seconds.
Thus, lower spread and slippage make order execution faster and easier, contributing to having more efficient markets.
How to Find a Legitimate Liquidity Provider
Liquidity providers are essential in the crypto landscape, ensuring stability and efficiency. However, finding a reliable company becomes challenging amidst the changing patterns and market conditions.
Therefore, when looking for a legitimate liquidity provider, ensure you review the following.
Offered Services
Liquidity providers offer tradable instruments at different ranges, and crypto exchanges always search for the deepest market liquidity with the highest number of crypto coins and tokens available.
Check out the services offered by the liquidity providers, such as the available assets, and order execution types, such as over-the-counter, swaps, ETFs, altcoins, etc. Additionally, check if they offer tools that help your trade offerings, such as on-ramp/off-ramp exchange tools and asset custodial wallets.
Pricing Plans
Liquidity providers imply various prices for their services, from set-up fees to commissions per service, etc. Therefore, check out their pricing policy and ensure there are no hidden fees.
Moreover, check out the scalability features, and if upscaling your business and increasing your volume comes with additional fees. Only hire the ones that offer suitable services for your business, especially if you have a limited budget.
Regulatory Framework
Working with a regulated liquidity company gives you peace of mind against the changing nature of financial markets and cryptocurrency. Illegal financial companies and scams are becoming increasing in the trading world.
Therefore, check out and validate the licence and jurisdiction that regulates the liquidity provider, which makes your business last and grow over time.
Final Remarks
Crypto liquidity providers are large financial institutions and corporations that execute significant trading requests in the market, putting out a huge number of buy and sell orders and enriching the order book.
LPs make crypto trading more efficient by increasing the supply rate of virtual coins and tokens at exchange platforms, resulting in faster order execution.
