Liquidity is one of the most important things when it comes to trading in any financial market. When it comes to crypto trading this liquidity becomes even more important, as if even one big exchange fails to provide liquidity it can affect the whole market. A good example of this is the recent FTX collapse, where FTX failed to provide liquidity to users wishing to withdraw their funds, resulting in bankruptcy and destabilization of the already weak crypto market.
Because of this people recently started to pay attention as to what affects liquidity in the crypto market and what they can do in order to stabilize the market. As we enter the second phase of the ongoing crypto winter and Bitcoin breaking one of its support levels for the first time in 200 weeks, this stability is needed more than ever.
What creates liquidity?
Before we discuss the effects of automated crypto trading on liquidity, let’s first take a look at exactly what creates this liquidity on the market. In the crypto market liquidity is mostly created in two ways, by market makers and liquidity providers.
Market Makers are people who place both buy and sell, also called bid and ask orders. These market makers place orders on both sides of the market and make profits from the spread between these two prices. They place buy orders for cheaper compared to sell orders and whenever the price moves up and down these traders make profits. This creates a flow of assets on the market and if there are a big number of these market makers on the market, traders can always execute their orders without the fear of slippages, or even worse, their orders not getting filled at all.
The second way markets keep liquidity is by the help of liquidity providers. Whenever you visit any exchange and visit their earn section, it is highly likely that you will see a liquidity section there. This way people who wish to invest their cryptocurrencies and plan on holding onto them, can provide liquidity to the exchange and receive interest rates on their assets. Exchanges then take these tokens and put them into circulation, giving the exchange the ability to operate and execute orders. But considering that cryptocurrencies have been on the decline this year, people try to avoid this investment option as most tokens are losing more value than profits that can be made through these interest rates.
Effect of automated trading on crypto market liquidity
Being one of the crucial components of the crypto market, liquidity can be greatly affected by automated trading. As we mentioned above, Market Makers are the ones who provide a big portion of liquidity to the market and earn good profits by doing so. Automated trading can greatly help traders automate this Market Maker system and provide liquidity to the market. Traders can use automated trading tools such as Bitcoineer to create an automated trading system where they automatically place this bid and ask orders on the market. These orders can be automatically changed according to the state of the market and the price of these assets. On top of this, traders can automate these market-maker systems across different assets and provide liquidity to many different crypto pairs.
Will we have a liquidity crisis?
Following this FTX collapse, a lot of speculation has begun that we are going to have a massive liquidity crisis. This is because of the already weak crypto market suffering this huge blow caused a lot of FUD and traders started to withdraw most of their cryptocurrencies from exchanges or are trying to straight-up sell their tokens. This mass withdrawal has left a big number of exchanges with small liquidity. The market is also suffering from these traders who are mass selling their tokens, with not many interested in purchasing cryptocurrencies right now, most of these sell orders are not filling and people are required to sell it below the market price. Everything this has raised big concerns about the potential liquidity crisis and everything that’s left for us to do is keep and eye on the market and avoid making any big trades.
