Liquidity is a touchy subject in the crypto world. Exchanges all claim to have it, yet traders frequently bemoan its absence, and the ensuing slippage they are forced to endure. Meanwhile, long-term holders watch anxiously from the sidelines, praying for a major liquidity shot that will entice institutional investors onboard to pump their bags.
The truth, as is often the case, lies somewhere in between: the top tier exchanges have ample liquidity to cover spot trading of the leading cryptocurrencies. Step outside of the top 10 coins by market cap, however, and the order books start to get pretty thin, pretty fast. Even highly liquid exchanges like Binance struggle with the lower cap coins; at the bottom end of the scale, there are Binance markets with volumes of scarcely more than 1 BTC.
Meanwhile, there are the Asian fake volume exchanges, whose data suggests they have all the liquidity, but try to execute a medium-sized limit order and see how much of it gets filled. The cryptoconomy might not be suffering a liquidity crisis, but it’s certainly got a liquidity problem. It’s a challenge which a number of enterprising projects are now trying to solve.
Market Making, One Coin at a Time
Virtually all exchanges deploy market making to some extent, and a number mandate it of newly listed projects, IEOs especially. Through providing liquidity, a market maker (MM) enables traders to buy and sell an asset easily, with minimal spread. Market makers don’t manipulate the price: they support it, leaving it to the market to decide where it moves. Whatever price the crypto asset settles on, a market maker will set buy and sell orders in the vicinity to meet the needs of traders.
Whereas once market making was a matter for exchanges to determine, it’s often now viewed as a task for the token projects themselves. This makes sense, given that their token will be listed on a range of exchanges with varying degrees of liquidity. Utilizing the services of a market maker evens out the choppiness between exchanges, and gives users a wide range of trading venues where they can buy and sell tokens at spot price.
One project that has taken the plunge and employed the services of a market maker is OmiseGO. Despite its OMG token having been tradable for over two years, the project has only sought to improve its cross-exchange liquidity now. It’s enlisted the services of Algoz, the same company whose MM is deployed by Cardano for its ADA token. The liquidity service will help to tighten OMG trading spreads, increase the depth of order books, and minimize the threat of market manipulation. Increased liquidity not only has the effect of increasing the credibility of the crypto markets, particularly to the eyes of the wider world, but it organically boosts trading volumes. Traders are more comfortable with trading higher amounts of digital assets that are known to be liquid, so they will gravitate to these markets.
Liquidity On and Off the Books
It’s not just on spot exchanges where there’s a need for greater liquidity: OTC desks are also in need of it to facilitate large orders from whales looking to ease in and out of bitcoin at close to market price. Here, demand for market makers and liquidity providers has also been strong. The crypto wealthy don’t just benefit from liquidity on the demand side, either: they can also participate on the demand side, and be rewarded accordingly.
Crypto exchange CoinFLEX, for example, has invited monied market makers to supply liquidity, and has promised participants a $250K rebate if it can hit $500m of daily volume for its BTC-USD futures. The exchange hopes to partner with a total of 10 entities to fulfill its liquidity quota. Just to further up the ante, CoinFLEX has pledged a $1 million bounty to each of its market makers if the exchange’s perpetual swap contract exceeds BitMEX’s corresponding offering in December.
As the need for greater liquidity throughout the cryptoconomy became apparent, new tools have emerged that make it easier for traders to identify liquid markets and cryptocurrencies. Messari has introduced its Real 10 and Liquid Market Cap indicators, which aim to provide a true picture of liquidity on the leading exchanges whose data can be trusted. On August 26, Nomics released its own transparent volume indicators, which quantify the amount of crypto volume that can be deemed “trustworthy.” Its data reveals only 6% of BTC’s volume to be fully transparent, versus 41% for Binance’s BNB.
As the campaign to acknowledge true volume over reported volume ramps up, the incentives for wash trading exchanges to game the system should diminish. Meanwhile, more crypto projects will commit to market making as they seek the legitimacy that deep liquidity brings.