What is crypto exchange liquidity and why should you care?

You've probably heard the terms "cryptocurrency exchange" and "liquidity" used in the same sentence several times before. Liquidity is an important aspect of every market — and is quite literally what keeps the wheel rolling. Without liquidity, you wouldn’t be able to cash out your coins on any exchange nor trade your favorite tokens. Let’s learn more about liquidity and why it is important.

What is liquidity?

Liquidity is a measure of how easy it is to convert an asset to a different asset without affecting its price.  It’s usually about how easy it is to convert an asset into cash since cash and cash equivalents are often considered the most liquid assets i.e they can be easily exchanged for other assets. Good examples of illiquid assets would be a house or yacht since they can't be exchanged easily.

In terms of cryptocurrencies, liquidity refers to the ease of converting a crypto asset to different crypto or to cash. Cryptocurrencies with huge market caps, like Bitcoin and Ethereum, are often the most liquid because, at any given point, more people are interested in trading or buying them.

What is cryptocurrency exchange liquidity?

Crypto exchange liquidity generally refers to how easy it is to convert between cryptocurrency assets on a particular cryptocurrency exchange. A very liquid exchange will, for example, allow you to exchange Tether (USDT) for Bitcoin (BTC) much quicker and cheaper than an illiquid one would. Typically, a cryptocurrency exchange with a lot of users would be more liquid than one with just a few.  

It’s basic supply and demand — crypto style.  When there are more buy and sell orders, the spread will be larger which means that you have more quotations to choose from. In contrast, low liquidity means that you have fewer orders — take it or leave it! For leverage and arbitrage, a larger spread is necessary.

Liquidity is an important factor to consider when making the choice of a cryptocurrency exchange—but don't just sit there and nod in agreement, read on to find out why!

Why is crypto exchange liquidity important?

Having access to as much liquidity as possible is super important in the fast-moving world of cryptocurrencies, and it could easily be the difference between getting a good deal and overpaying for your crypto (Yeah, don't do that). Here's why liquidity is so important:

Better prices

A crypto exchange with liquid markets grants you access to the best available prices due to the high number of buyers and sellers on their markets. If you're looking for a bargain (which you should), you need all the liquidity you can get.

Quicker trades

A liquid exchange is able to trade between assets quicker and more efficiently as there are several people available to buy or sell a given asset at any time. Translation? Zero waiting time for your orders! Also, this speed is often crucial to traders, who must swiftly enter and exit their positions to maximize profit.

Being able to execute trades quickly doesn't just help you capitalize on profit opportunities better but also reduces risk as you can exit an unfavorable position as quickly as you entered it.

No slippage

Remember that one time when those pants you ordered online didn't quite fit as you expected (yes, it's not you —  it's the shorts)? Well, the crypto version of this is called "slippage", and it's quite a bummer.

Slippage is what occurs when the price you intended to buy a cryptocurrency is different from the price you actually got to buy it. This situation occurs if you set a market order on an exchange — which means you’re willing to pay any price to purchase that crypto. On illiquid exchanges (or illiquid markets) where the number of sellers are less, that can turn out to be expensive as you sometimes don't get as good of a deal.

On the other hand, on a liquid exchange, slippage is practically non-existent, meaning you always get your crypto at the price you ordered them.

Hopscotch and liquidity

Hopscotch is a liquidity provider dedicated to enabling highly transparent digital asset conversions for the everyday cryptocurrency user. Hopscotch, developed by Hedgehog—the first crypto robo-advisor licensed to give financial advice in the US—brings the world's digital asset liquidity to the tips of your fingers.

It does this by sort of "aggregating" the liquidity of pretty much all the major cryptocurrency exchanges in the world, both centralized and decentralized. It basically uses complex algorithms to analyze every market that's out there and creates paths between them in a bid to find you the best possible price.

Consider a scenario where you want to trade your Ether (ETH) for some US dollars. Hopscotch first performs a thorough analysis of the available markets, then might decide to swap your Ether for USDT on Sushiswap, sell the USDT for Solana on Binance, sell the Solana for Dogecoin on Kraken, and so on., eventually getting you your US dollars. The end result is that you're able to trade your Ether at the very best rates, rates you won't find on any exchange.

And don't worry, all this happens behind the scenes and in a split second. Pretty dope, right? Hopscotch is also retail-only, meaning that it is tailored to and focused on serving retail traders like you.

Hedgehog & Hopscotch

Hedgehog has support for a staggering 2000+ assets, over 550 wallets, and over 170 exchanges, which means you can use it with pretty much any crypto and wallet you like, to make the most of the world's largest exchanges' liquidity. And as Hedgehog has partnered up with Hopscotch, accessing the benefits of liquidity is just a button click away.

With Hedgehog and Hopscotch, you'll never have to worry about liquidity. Sign up with Hedgehog today!

Lipsa Das is the founder of Spiritwish, and you can find her on Twitter, LinkedIn, and Instagram.

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