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What is cryptocurrency ‘liquidity’ and why is it important?

The term liquidity is generally used in financial markets to describe the ease by which an asset can be converted into cash without difficulty and without drastic swings in said asset’s price. In cryptocurrency terms, liquidity is the ability of a digital asset to be easily converted into cash and/or other digital assets.

Liquidity is truly fundamental for all tradable assets including cryptocurrencies. In fact; high liquidity indicates a vibrant and stable market, where participants can trade quickly, easily and at fair prices.

A stable market is one invulnerable to large swings in asset prices due to large trades. Whale traders moving large volumes, for example, can significantly influence prices in illiquid markets.

Low liquidity levels means the market is prone to volatility, causing hefty spikes in cryptocurrency prices. High liquidity, on the other hand, means there is a stable market, with few fluctuations in price.

As a cryptocurrency investor you want to trade on marketplaces with high levels of liquidity so as to ensure you can enter or exit a trade at any given moment and at an equilibrium price that justly reflects conditions in the actual market. This is known as the asset’s intrinsic value.

Intrinsic value means that the lowest price a seller is willing to sell at (ask) is close to the highest price a buyer is willing to buy at (bid). The difference between these two values is called the bid-ask spread. When it is difficult to find a counterparty to your trade there is generally a high bid-ask spread. This is where market makers step in.

Market making is core to the functioning of the crypto-sphere. Market makers ensure the crypto economy is fluid by providing liquidity to both buyers and sellers in a financial market. Without this liquidity – market participants trading large volumes would experience substantial losses through slippage.

Slippage occurs when the bid-ask spread changes between the time a market order is requested and the time an exchange (or other market maker) executes the order.

On an open order book large orders result in a blended-average price after being aggregated over a number of counter-parties. By the time this large order is filled the price is very different to what the investor initially intended (aka Slippage).

What these high volume traders need is an over the counter (or OTC) Desk like the one at OVEX.

OVEX is a well-known South African cryptocurrency market maker and has opened up cryptocurrency to larger institutions now joining the fold – namely through its over the counter (or OTC) Desk. Whether it be hedge funds, asset managers or even commercial banks! Cryptocurrency is beginning to garner institutional interest.

According to EY, close to a quarter of large fund managers expect to increase exposure to crypto-related assets over the next two years. In 2021 alone institutional inflows into crypto markets reached a record USD 9.3 billion – a 36% increase from the year prior.

OVEX has uniquely positioned itself as a market maker that has built the depth of liquidity necessary to comfortably service these high-volume players. It is this liquidity that gives investors peace of mind when trading with OVEX.

But how does this ‘market making’ process work? Say you are looking to sell your crypto holdings in XYZ. A market maker will come along and buy your XYZ. They will then hold onto these until say John (also looking to buy XYZ) comes along.

The market maker maintains two quotes, a bid (or buy) rate that they quote you and an ask (or sell) rate that they quote John. The difference between the two, the spread, represents the money the market maker collects for its service.

Market makers with deep liquidity, like OVEX, save institutional investors substantial money as they generally offer the tightest bid-ask spreads. In fact – OVEX offer prices that are a minimum of 2% more competitive than local SA exchanges for orders over R1 million.

These institutional players, however, have very specific needs when it comes to investing.

  • They are required to abide by rigid corporate rules that retail investors need not consider.
  • They are also under far more scrutiny to adhere to governance and compliance rules, with oversight being applied by various regulators.
  • What is more they need access to marketplaces with deep liquidity so that they can execute their large orders off of open order books and at a single price (without Slippage).

With OVEX, these high-volume clients have peace of mind knowing that every order, regardless of its size, can be locked in immediately at a price close to intrinsic value.

Importantly, OVEX is a crypto exchange that takes compliance seriously. Something that bodes well with institutional investors. It does this by undertaking comprehensive due diligence on corporate accounts and by implementing stringent KYC/AML protocols. What is more – the exchange is regularly audited by an impartial big 5 accounting firm.

The OVEX OTC Desk offers the following features:

  • Industry-leading custodial security that doesn’t compromise on user experience
  • Single price execution for large orders
  • Price-lock and a post-trade settlement credit line
  • Open 24/7, 365
  • Access to a dedicated team of traders
  • Bespoke white-glove service

These features combine to give investors a sophisticated cryptocurrency trading experience, and are why the OVEX OTC desk processes monthly volumes of over R7.5 billion.

Start trading real volume with OVEX.

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What is cryptocurrency ‘liquidity’ and why is it important?