When you trade CFDs, liquidity is just as necessary as when you trade any other form of investment. This article will cover why it is vital to ensure that you have sufficient crypto market liquidity when trading CFDs and how you can always have that liquidity on hand.
CFDs and Crypto
Stocks or Forex involve buying or selling underlying assets. For instance, you might purchase Google shares or sell Euros for US dollars. Crypto CFDs, however, are not crypto purchases or sales. You’re instead speculating on how the price of cryptocurrencies will move using derivatives contracts.
Unlike regular trading, crypto CFDs are traded on margin, meaning that a small deposit is all that is required to open a position. By leveraging your capital, you can potentially increase profits — but higher risks are also involved. You could lose more money than you originally invested if the cryptocurrency price moves against you.
Crypto liquidity plays an important role here. Liquidity refers to the ease with which an asset can be purchased or sold without affecting its price. The result is that you don’t have to worry about slippage (the difference between a trade’s expected price and its actual price) when entering or exiting trades.
Alternatively, low liquidity in crypto makes finding buyers and sellers difficult, causing slippage and wider spreads (the difference between the bid and ask prices).
Because the cryptocurrency market is still young, and not so many traders are actively involved, cryptocurrencies have less liquidity than other types of investments like stocks or Forex.
Trading with a broker that offers adequate liquidity will prevent these problems. Then, you won’t have to worry about slippage and wide spreads, and you’ll be able to enter and exit trades quickly.
Types of Crypto Liquidity
Liquidity in the crypto market comes in different forms:
- Exchange liquidity
A cryptocurrency exchange’s liquidity refers to the ability of an asset to be bought or sold quickly and easily on a crypto exchange. Popular assets listed on multiple exchanges usually have high liquidity for crypto exchanges.
- Wallet liquidity
This type of liquidity is measured by how easily it can be bought or sold from wallets supporting it. Several factors affect wallet liquidity, including the number of wallets that support the asset, whether the asset can be converted into other currencies easily, and whether it can be transferred easily.
- Network liquidity
In a blockchain network, network liquidity refers to how easily assets can be exchanged among users and the amount of activity on the network. Network liquidity is influenced by a number of factors, including the number of users, the number of transactions, and the speed of the network.
- Over-the-counter (OTC) liquidity
Institutional and institutional investors often use OTC liquidity to trade large amounts of crypto without affecting market prices. OTC brokers purchase and sell assets directly between users without relying on exchanges.
- Derivatives liquidity
A derivative is a financial instrument based on an underlying asset. The size of the derivatives market has a significant impact on the liquidity of underlying assets. In addition to providing liquidity to spot markets, derivative markets offer traders the opportunity to bet on the future price of assets.
What Is The Best Way to Make Sure That You Have Sufficient Liquidity When Trading Crypto CFDs?
There are a few ways you can make sure you have access to enough liquidity when trading Crypto CFDs, including:
1) Analyze the order book: An exchange’s order book lists every buy and sell order traders have placed for that asset. When you look at an asset’s order book, you can figure out how liquid it is and whether any large orders might affect the price.
2) Place limit orders: By placing limit orders, you can specify the precise price at which you wish to purchase or sell an asset. By doing this, you are able to ensure that you will have sufficient liquidity.
3) Place stop-loss orders: If you want to avoid losses in your portfolio by selling an asset at a certain point, you can use a stop-loss order. A stop-loss order, when placed, will sell an asset if its price drops below a certain level. This allows for your account to be protected from losses, as well as provides you with access to liquidity when needed.
4) Check the trade history: In order to determine the level of activity for an asset and whether there is enough liquidity to support your trading, you can check its trade history. The trade history is the record of every trade that has been made in exchange for that asset.
5) Check the trading volume: An asset’s trading volume shows how many trades have taken place over a particular time period. When you check the trading volume, you will be able to tell how much liquidity the market has.
6) Keep up with the news: News can often affect the market’s liquidity. For instance, if there is news of a big platform going offline, the liquidity of the market could be reduced. To avoid getting caught off guard by sudden changes in liquidity, it is always important to check the news before trading.
Hopefully, these tips will help you to ensure that when you trade Crypto CFDs, you will be able to access sufficient liquidity.
Summary
If you plan to trade any asset, especially cryptocurrency, liquidity is an important factor to consider. In order to ensure your trades will be executed at the desired price, it is crucial to know the liquidity of the market before you trade. If the market moves against you, you will be able to avoid potential losses.
Furthermore, it’s crucial to keep up to date with the latest news and developments on the market because its liquidity can change rapidly. As a result, you will always be able to make well-informed decisions when you are aware of the market’s liquidity level.
