Contest Alert 📢: S4B Crypto Contest - Season 15
Great steemians, we are here again to gain more knowledge about the modern day second item used for transaction called cryptocurrency. We are able to buy and sell crypto currency in the market as a result of certain provisions put in place and made available to us in the market.
In the crypto market there are the liquidity providers and there are the users of the liquidity provided. Both the liquidity providers and the users of the liquidity been provided, are able to connect and conduct their transactions because crypto assets are been put forward to effect the transaction. @waqarahmadshah coming up with this topic is very important as the STEEM is also a liquid digital asset that moves the steemit ecosystem. Now I would be explaining what liquidity is, how liquidity affects bid-ask spreads, and how sudden liquidity drops impacts traders.
Liquidity is the ease at which digital assets such as crypto currency, could be bought and sold with little or no much differences in prices of the assets. Liquidity does not just occur and work on its own, there are some necessary instruments that are put in place to facilitate the the provision and accessibility of the liquidity provided. Such instruments include:
Adoption of the crypto assets
The regulation
The asset trading volume
Market sentiments
Advancement in technology
All these has an important role they play on the provision and accessibility of the liquidity.
[source]A shot from Bybit Exchange
Liquidity affects BID-ASK spreads in the market through:
- Volatility of market
- Speed of Transaction or Order Execution
- Effects Of Price and Slippage
When there is high liquidity in the market,
the bid–ask spreads would be reduced and the cost of transaction would also be reduced as well. On the other hand, low liquidity increases the bid–ask spreads and the cost of transaction would also rise since it cause thebuying and the selling price to also increase.
In a high liquid market, traders' orders are executed as fast as possible because of more market traders who are available to meet up the required buy and sell orders. In low liquid markets, order execution are slow and may not even be executed at the expected price.
A high liquidity enables traders to execute large amount of orders which does not really impact prices hugely with a little trade Slippage. In a low liquid market, little order execution may cause prices to change which would cause a high trade Slippage.
[source]A shot from Bybit Exchange
A sudden drop in liquidity raises anxiety among traders in the market. This lead to panic selling, dump of the token, and token apathy. When these happens, the bid–ask spreads would be widened and Slippage also increased sharply.
I believe that I have added some knowledge to the issues raised in this contest. I urge fellow steemians to also come up with their ideas as to deal with the topic of this contest and bring out fresh as well. This would enlarge our knowledge bank and have the needed knowledge on the important role liquidity play in the cryptocurrency market.