The main task of a businessman or a simple person is to increase their capital and make it work for them. Investing in the stock market, currencies and cryptocurrencies at this background for several years gained enormous popularity as a passive income.
The sphere of trading in stocks, bonds and other assets may not be so difficult to understand if you spin in all this every day. This is more common for experienced investors. Beginners, on the other hand, often get lost on this path, taking losses instead of increasing liabilities. One of the key things every investor and trader should be aware of is the concept of liquidity providers (LP).
What are liquidity providers?
As a rule, it is a company that holds assets in its accounts in order to organize their sales. They are active both on the side of the buyer and the seller. In other words, they “make the market”. Therefore, cryptocurrency liquidity providers are often called market makers. It is a special trading bot for exchange platforms.
Successful liquidity provider creates a big impact on exchanges. The trading volume, first of all, depends on them, and not on ordinary users. Accordingly, the more trading time a cryptocurrency market maker takes, the more attention he can attract.
3 postulates of market makers
Choosing a Bitcoin liquidity provider is a rather complicated process. It is not enough to read about different companies, focusing on the service with the highest rating. It is necessary to conduct an analysis of pricing, trade infrastructure, economic efficiency and legal aspects of the company. When searching you need to start with the basic principles of the work of market makers.
They increase market figures
The cryptocurrency market is known for empyreal volatility indicators. Therefore, crypto exchange liquidity providers, “making the market” concentrate most of their activity on increasing trading volume and reducing the frequency of price changes.
First of all, this is achieved by increasing the number of available assets in the trading pair. This creates a constant flow between supply and demand. The connection of the liquidity provider with financial institutions around the world reduces spreads. So cryptocurrency exchange, which necessarily cooperate with market makers, work more stable and attract more newcomers.
They earn on differentials and commissions
You may ask: how then market makers manage to make a profit on the low-volatility market? First of all, it should be remembered that sensible traders do not play with large spreads. Since suppliers are also participants in deals, they are interested in a smaller difference in supply and demand.
The main source of profit is the plural amount of low spreads, which appears due to the high trading volume. They also receive considerable profit from commission fees for each transaction.
They have a wide range of services
The forums have been said that a service that offers only the best prices for a deal is already irrelevant. With the current pace of the market, much more tools are needed. A good market maker not only provides low spreads, but is also able to perform all tasks with minimal delays. That is, such a company must be a multifunctional service.
Conclusion: the search for liquidity providers for cryptocurrency exchange is to study the company's tools and their activity in the market. The market maker should take at least 90% of the trading time. Otherwise, they have no success, and therefore cannot ensure the stability of the services of their customers.
The above is just the foundation. To choose a good Bitcoin liquidity provider you need to consider a lot more factors.
Reliability. Efficiency analysis is a time consuming process. But does it make sense to kill at this time, if honesty is in question? Therefore, it is worth starting with checking the regulators of crypto liquidity provider. Moreover, the reliability of the latter also needs to be checked. Many have heard about the risks of fraud in the investment market, so you only need to work with a reputable market maker.
Execution. The cryptocurrency exchange liquidity must carry out transactions instantly. Deviations are allowed, if there is a convincing argument. Everyone who cooperates with a market maker should have the opportunity to check transactions through automated trading software that allows you to build detailed statistics. In other words, transactions must be transparent.
Pricing. You must have one hundred percent certainty that the instruments, like the transactions themselves, are not burdened with swaps. This item requires special care, because in the cryptocurrency world not many liquidity providers offer their own patented trading technologies.
Providing information. The provider must have stable and reliable channels without gaps in the graphs. The tape should reflect prices on different exchanges and provide tools for comparing them. Access to market history is an integral part of a quality market maker.
Reporting. Any service operating in the field of finance or investment must display information about its activities. This is correct when the Bitcoin liquidity provider has complete reporting tools, including:
- email notifications;
- reports on closed and open transactions for the requested period;
- profitability report;
- statement with exchange points;
- tick history.
How to reach an agreement with the provider
It should be understood that the supplier of liquidity is a full-fledged partner, and therefore the relationship must be appropriate. First of all, you need to show the market maker that you are aimed at fruitful cooperation. Therefore, it is necessary to determine the list of issues for discussion, among which are required:
1. What trade interfaces does the liquidity provider offer?
2. How many resources will the liquidity provider need to create a convenient trade flow? (depends on the level of attractiveness for customers, and hence the volume of trading on the service).
3. Is statistics provided for negative and positive slippage? (this parameter will allow you to more accurately calculate future profits, as well as assess the level of the liquidity provider).
4. Where are the data centers located? (the delay in carrying out operations depends on it).
Why liquidity providers are needed
The cryptocurrency market is considered very unstable, especially recently, when it shows only a fall. Attitudes toward Bitcoin have long ago become scandalous since the project has lost its position and cannot compete with many altcoins. Nevertheless, it has the highest trading volume, which means that any service should provide the maximum possible crypto liquidity.
This can be done on its own, but you have to spend a lot of power and resources. Accordingly, there will be no time left for the development of the exchange itself or the exchange service. That is why it is recommended to use the services of liquidity providers.
It is needed to take care of this almost in the first place. After all, high liquidity of trading pairs is a direct path to project success and attracting new investors.
You can approach this issue as responsibly as possible, taking everything into your own hands. One option is to develop your own software to increase liquidity. However, it takes a lot of time and resources, and most importantly - special knowledge.
To solve the problem, you can contact the companies that develop the appropriate software. For several years, the company has been launching startups in E-commerce, FINTECH, P2P and related fields. They also have their own tools to increase liquidity.
Other ways to increase liquidity
Sometimes they do not want to contact market makers because they see them as ordinary manipulators. Also, not all companies can provide fast and stable growth rates. But liquidity providers are not the only instrument.
A rather popular way is to use other cryptocurrency platforms for making payments. Now it is based on the cooperation of exchanges. With insufficient reserves on one service, the exchange buys a cryptocurrency on another. After that, funds are instantly transferred to the client. This significantly reduces delays in transactions, which means that customers have more opportunities to create new orders.
In 2018, the Blockchain Exchange Alliance and Oneroot announced a partnership. As part of their collaboration, they plan to create a single pool of multiple platforms. Thus, all transactions and the order book within the pool will be linked.
A successful example of such a project is Bancor cryptocurrency. It allows you to create projects on your blockchain. However, coins have a completely different look. They are based on a certain “reserve” consisting of other tokens. The founder of the platform is free to choose any cryptocurrency for the reserve, but as a Bancor should always be included in this list.
This creates the infinite liquidity provider crypto exchange of the new token. After all, now it does not depend on its own indicators, but on the general situation of all coins that are in reserve. The same concept eliminates the need to use a third party to exchange.
How to find a market maker: results
Bitcoin liquidity providers always act on the market, both buyers and sellers. Since they “make the market”, they have the responsibility to ensure price stability and high trading volumes, as well as to help new investors reduce risks.
The chosen market maker should have high stability indicators. Priority should be given to companies that have been working for a long time, have a proven reputation and are focused on long-term cooperation. This instills confidence that he will not retire as soon as he receives the first large profit.
A liquidity provider should provide broad and evolving opportunities, including customized solutions, which will allow to gain an advantage over competitors. Therefore, it is necessary to analyze the prices and channels of the company.
The market maker must have extensive tools for working and analyzing the market. One of the key components is a tape with prices on different exchanges, including the possibility of comparing indicators. In addition, gaps in charts or the absence of a history of quotations are not allowed.
Cryptocurrencies are digital assets only and all transactions go through the network. But contact with the liquidity provider should always be top notch. It is not only about e-mail, but also about telephone communication. The provider must be able to answer any questions 24/7.
But finally, you should not choose a cheap option. As a rule, the reduction of prices is achieved through savings on system maintenance and the development of market tools. All this only increases the risks, such as technical failures, inflated commissions, low liquidity and trading volume, an increase in the spread.