Cryptocurrency markets have become extremely unstable lately. With Bitcoin’s inability to compete with many altcoins, attitudes toward the project have long turned to concern.
However, the Bitcoin market has the highest trading volumes, meaning any service should provide the maximum amount of liquidity. That’s where cryptocurrency liquidity providers are doing their job.
If you are thinking about starting a brokerage, one of the first things you should consider is your company’s liquidity. The same logic is valid for a bitcoin exchange.
Why is Bitcoin liquidity important?
Cryptocurrency liquidity refers to the ability for tradeable digital assets to be converted into cash or other cryptocurrencies without difficulty. The more liquid the virtual currency, the fairer the price.
The greater the number of participants in a market, the easier it is to buy or sell cryptocurrencies since buy-and-sell orders will be filled more quickly. The nature of the cryptocurrency markets means it is possible to enter or exit a trade at any given moment, making it possible to hold a position for long periods.
Liquidity plays an essential role in trading assets, including cryptocurrencies. Cryptocurrency price spikes occur when liquidity levels are low, which causes market volatility. In contrast, high liquidity signifies a stable market with few fluctuations.
Who are crypto liquidity providers?
The crypto liquidity provider is the market maker responsible for enhancing the liquidity in the trading platform. Crypto exchange liquidity providers gain profits by buying and selling digital assets, just like on the traditional market. Therefore, they essentially “make the market.” This is why they are frequently called market makers.
An effective liquidity provider contributes significantly to exchange activity. First and foremost, the trading volume relies on them, not ordinary users. So, a cryptocurrency market maker that spends more time trading will attract more attention.
The concept behind the cryptocurrency market is to organize and boost sales of virtual assets by storing bitcoin in its accounts. Liquidity providers for cryptocurrency exchanges focus on providing this high liquidity to buyers and sellers.
Picking a Bitcoin liquidity provider can be a challenging task. A simple search of companies with the highest ratings is insufficient. Analyze the company’s pricing, trade infrastructure, economic efficiency, and legal compliance.
Things to keep in mind when choosing a liquidity provider
Brokers need to evaluate their own needs and take into account several factors to find the best liquidity provider:
The broker should be aware of the assets and liquidity levels available in the whole package. The liquidity provider should provide multi-asset liquidity in addition to the FIX protocol and historical data. Ideally, the platform should also allow users to create accounts in several currencies and accept all major stable tokens and cryptos for deposit and withdrawal.
The market depth
This is another critical factor to consider. This indicates the liquidity and depth of the currency market. A deeper market has a greater number of buy and sell orders at each price.
Particularly during times of market volatility, a liquidity provider must offer fast trade executions without requotes or slippages.
Prices offered by liquidity providers should include competitive spreads, low commissions, and no compromise on swaps.
Clients should be able to access reliable and stable data feeds from their liquidity providers. In addition to real-time quotes from the relevant exchanges, the price feed should also include data from the interbank foreign exchange market. Insufficient delivery of price data could lead to price gaps.
Regulatory oversight of liquidity providers should be carried out in the same way brokers are to ensure they are using industry-standard practices and that a prime broker backs them up.
Compliance with regulatory requirements is easier when a liquidity provider has a robust and automated reporting system. Some of the typical reporting types are trading reports, FIX bridge reports, swaps and rollover reports, and order book access.
An ideal liquidity provider should have FIX and other API capabilities, MT4/MT5 bridge connections, and FIX bridges.
Other things to keep in mind
A 24-hour availability
Your liquidity provider must remain responsive and available to respond promptly to your requests for updates. Ensure you clearly outline this request in the service agreement and provide as much detail as possible.
With a trustworthy liquidity provider, you can prove your exchange platform is a reliable source for trading. A liquidity provider’s poor performance will result in your own risks. Therefore, it is crucial to select a company that has a good reputation.
The effectiveness of daily tasks plays a key role. Cryptocurrency exchanges are by nature unpredictable, so you need to be prepared to deal with issues as they arise. Consequently, you should have access to an automated trading server provided by your liquidity provider to all parties that work together to ensure the transaction flow can be tracked.