Education

Deep Liquidity: The Key to Confidence and Fairness in Cryptocurrency Trading

, May 16, 2023

While it sounds like a buzzword (or words), “deep liquidity” is important to market health, and is foundational to a strong cryptocurrency trading experience.

At CEX.IO, we want our users to have all the tools and knowledge available to make the most informed and advantageous decisions. This is why we put together the following guide, taking a closer look at deep liquidity, why it matters, and how CEX.IO implements it. 

Read on and let us serve as your trusted guide in making informed trading decisions, by educating you further about an important component of cryptocurrency markets.

Qualities of markets with deep liquidity

Deep liquidity is a measure of how easily large sums of cryptocurrency can be traded, without significantly affecting market stability. Benchmarks by which deep liquidity can be assessed include:

  • Time of transaction: Deep liquidity allows orders to be executed and filled in short periods of time.
  • Depth: This outlines whether or not large orders have significant impacts on price. Markets with large quantities of cryptocurrency ready to be traded, and many buyers and sellers, are considered to have “depth.”
  • Spread: In markets with deep liquidity, there will be little difference between bid and ask prices. This benchmark is commonly referred to as the “bid-ask spread.” 
  • Resiliency: Markets with strong resilience and deep seated liquidity will quickly find equilibrium after disturbances.
  • Price slippage: The difference between the expected price of a trade, and the price at which the trade is filled. Orders are filled at the prices expected by traders, in markets holding deep liquidity.

Deep liquidity is important for crypto markets because it helps to ensure fair and insulated prices. It secures market fairness by reducing the risk of price manipulation, while promoting price stability. This means the influence of traders with large positions is limited to the upside and downside.

Additionally, deeply liquid markets enable traders to efficiently and effectively position capital. This ability opens them up to new opportunities and could protect them from negative risks in some cases. It can allow users to promptly take advantage of inefficiencies across markets (e.g. price arbitrage), and manage risk productively. If traders are not able to easily buy or sell cryptocurrencies, they may miss out on profitable trades, or find themselves unable to exit losing positions in a timely manner.

Most importantly, the culmination of these factors instills confidence. When prices are relatively stable, and capital remains efficiently mobile, traders have more trust in the markets and the platforms they frequent.

How CEX.IO delivers

In a major step forward in user empowerment, CEX.IO recently launched its award-winning product, Exchange Plus. Deep liquidity sits at the core of the exchange, providing traders of all sizes and experience levels with the benefits of CEX.IO Prime. 

Prime is the institutional arm of the CEX.IO ecosystem. It is the tool that keeps markets on Exchange Plus deeply liquid, fair, and smooth so users can trade with confidence. It was originally reserved as a solution for institutions and high volume traders, like brokers and banks, but is now open for all users through Exchange Plus –  where available.

CEX.IO Exchange Plus has geographical restrictions. Check our Help Centre to see if you can benefit from the ultimate trading experience provided by Exchange Plus.

How to verify market liquidity

There are several ways to confirm how liquid a market is, using the basic tools and data provided by most exchanges. Here are a few methods:

Order book/market depth analysis

The order book is a record of all the buy and sell orders for a particular cryptocurrency on an exchange. By analyzing the order book, traders can get an idea of the depth and liquidity of the market. 

Market depth refers to the amount of cryptocurrency ready to be traded at different price levels in the order book. A market with deep liquidity will have a large number of buy and sell orders at various price levels.

Volume analysis

The trading volume is the total amount of a cryptocurrency that has been bought and sold on an exchange over a set period of time. Higher trading volumes generally indicate a more liquid market, as there is more cryptocurrency actively changing hands.

Spread analysis 

The spread is the difference between the highest bid price (highest price a buyer is willing to pay) and the lowest ask price (lowest price a seller is willing to accept) in the order book. A tight spread can indicate that there is a lot of trading activity and liquidity in the market, while a wide spread suggests the opposite.

While order book analysis provides insight into the number of orders at different price levels, volume analysis gives a sense of overall trading activity. Spread analysis highlights the level of liquidity in the present, and market depth analysis provides more precise information about liquidity at prospective price levels. By looking at these factors together, traders can get a more holistic picture of a market’s liquidity profile, and make more informed trading decisions.

Wrapping up

Deep liquidity is a critical aspect of cryptocurrency trading. In this blog post, we’ve explored the key components of deep market liquidity, why it matters, and how to verify the liquidity of a cryptocurrency market. By understanding deep liquidity, traders can make informed decisions and maximize their trading potential. With the launch of CEX.IO Exchange Plus, traders in available locations can access all the benefits of deeply liquid markets with confidence, and benefit from the ultimate trading experience.



Note: Exchange Plus is currently not available in the U.S. Check the list of supported jurisdictions here.

Disclaimer: Information provided by CEX.IO is not intended to be, nor should it be construed as financial, tax or legal advice. The risk of loss in trading or holding digital assets can be substantial. You should carefully consider whether interacting with, holding, or trading digital assets is suitable for you in light of the risk involved and your financial condition. You should take into consideration your level of experience and seek independent advice if necessary regarding your specific circumstances. CEX.IO is not engaged in the offer, sale, or trading of securities. Please refer to the Terms of Use for more details.

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