Huobi Group CFO
Following the Terra-Luna collapse which shook the crypto industry, there appears to be no let-up to the number of players facing liquidity crises. Zipmex is the latest exchange to join a growing list of embattled crypto platforms including Vauld, Voyager Digital, CoinFlex, Babel Finance and Celsius Network, which have filed for bankruptcy or faced insolvency amidst the market volatility.
Their troubles have brought home the importance of liquidity to the crypto industry, which can be likened to the lifeblood of exchanges. Defined as the ease by which an asset can be converted into another without affecting its value, liquidity is critical to the smooth and stable operations of the crypto market. Simply put, it ensures people can buy and sell their assets in the desired quantities as quickly and efficiently as possible.
How liquidity keeps crypto market running
As with many things, the role of liquidity becomes clearer when we look at what can go wrong in its absence. For example, with fewer participants in the market, transactions will take longer to complete as more time is needed to execute buy and sell orders. In an illiquid market, large trades can contribute to market volatility by causing large swings in prices, setting up the risk of price manipulation by bad actors. Slippage, which is the difference between the market price and the actual price fetched in a large trade, can also take place due to a lack of liquidity.
We have seen what happened during the latest market meltdown, when many investors bolted for the exits with far fewer venturing in. Exchanges with weak risk controls were caught in a liquidity crunch and forced to halt or limit withdrawals. This inevitably sparked market panic as the inability to access or sell digital assets can severely damage investor confidence.
What to look out for to gauge an exchange’s liquidity
What can investors look out for in exchanges that may indicate healthy liquidity? At the exchange level, a simple yardstick is to look at its 24-hour trading volume on a website such as CoinGecko or CoinMarketCap. However, as trading volume can be artificially inflated with wash trades, high trading volumes may not always mean high liquidity. Accordingly, both sites claim that their respective proprietary methodologies rank exchanges based on liquidity and other factors such as trading activity, traffic, technical expertise, cybersecurity, and confidence in the legitimacy of their reported trading volumes.
While its 24-hour trading volume fluctuates in line with the market, Huobi Global consistently ranks among the top 10 exchanges on the aforementioned sites, which underscores our market leadership. That said, we’re driven not by third-party rankings, but by our mission to make crypto accessible to all.
Huobi Global works hard to deliver a quality trading platform with a wide breadth of trading products and services, scale and liquidity, as well as asset safety and security which only a centralized exchange can offer. There are very few platforms that can provide these three attributes on a global scale, across many countries and regions.
At the end of the day, users want to be able to trade almost everything on one platform, which is the main value proposition offered by Huobi Global. On our platform, users can trade one of the widest selections available on a centralized exchange, from more than 500 cryptocurrencies to complex derivatives, asset management products, and more. This contrasts with many smaller exchanges, which only offer a handful of cryptocurrencies.
Our experience shows that scale and liquidity is especially important for larger institutional investors, who need to be able to get in and out of large positions quickly while avoiding slippage. Although the latter can also be caused by price volatility which is harder to control, investors can reduce their risks by choosing an exchange with greater scale and liquidity.
Asset security matters as much to investors
It is during times of market upheaval that scale and liquidity serve to separate the wheat from the chaff for exchanges, as I noted in an earlier blog. With its deep liquidity and large scale, backed by strong risk controls and healthy reserves, Huobi Global has been able to operate normally across all market cycles in its nine years of operations. This is why we continue to guarantee our users’ right to deposit and withdraw funds at any time, regardless of market conditions (often cited by troubled exchanges as the reason for limiting or suspending withdrawals). The lesson for investors? While scale and liquidity matter, don’t miss the forest for the trees by also looking at the exchange’s ability to keep your assets safe. In these uncertain times, there’s peace of mind to be found just by learning how to better manage your risks.