Liquidity is not just a concept. It is also a factor that determines the stability and efficiency of the market. For those in the industry, understanding liquidity is extremely important. Because it directly affects the ability to trade, the level of risk, and the opportunity to profit. So, let’s learn about the usage and concept of What is liquidity mining with Crypto Trading!
What is liquidity mining?
Liquidity Mining is a strategy in the Crypto market. It is designed to incentivize users to provide liquidity to exchanges. It can also be found in decentralized finance protocols. Through the concept of What is liquidity mining, participants are called Liquidity Providers – LPs. They can deposit money and digital assets into an exchange. Or they can go through a decentralized finance protocol (DeFi protocol). Competitors will be rewarded with tokens of that crypto-finance project.
Definition What is liquidity mining?
Liquidity is the ability to buy and sell large amounts of cryptocurrencies without causing significant price fluctuations.
The concept of Liquidity Mining is not only present in the cryptocurrency market. It is also present in other types of trading assets. An asset is considered to be highly liquid when it can be sold quickly. Moreover, the price does not fall much from the expected price. Typical examples of highly liquid assets are BTC and ETH.
Example of liquidity in Crypto Trading
A good example of a liquid asset in the real world is gold. In the Liquidity Mining concept, you can easily buy and sell gold anywhere. And it is no longer limited to gold shops. The reason gold is liquid is because its value is widely recognized. At the same time, gold is accepted by people everywhere.
Another example to describe liquidity mining is cash. Every day we always make transactions to exchange money for goods or services. Therefore, cash is considered an extremely liquid asset.
Some assets that have low or very low liquidity include real estate, antiques, furniture, art, and many others. These assets often require a lot of time and effort to buy and sell due to their specificity. At the same time, they have a limited buyer base.
See more: Learn Momentum – The 3 principles of optimal trading
The Importance of Liquidity Affects How Crypto is Traded
Based on the concept of What is liquidity mining, it can be understood that liquidity is always an important factor to consider. Liquidity is a big challenge for investors with large capital who want to participate. Liquidity directly affects prices. This causes a difference between expected profits and actual profits.
Let’s say you are holding a large amount of token B and currently have a profit of 30%. You want to quickly sell token B to capture this profit. Unfortunately, token B is very illiquid. If you accept to sell at its current liquidity, you could lose up to 50% of its value. This turns a 30% profit into a 35% loss.
You want to sell at a 30% profit and want to make sure of it. It may take longer for them to execute the transaction at that price. However, the market does not depend solely on your decision. If you do not sell, there will always be someone else willing to sell, which can quickly drive the price down.
Therefore, choosing coins with high liquidity is always considered safe. Especially for investors with large capital. In addition, you can explore more about the nature of coins and tokens or technical analysis of the Momentum indicator in the cryptocurrency market to increase the possibility of success.
Technical analysis factors affecting liquidity
Technical analysis plays an indispensable role in assessing and predicting liquidity. This is a field of study and application of technical tools. The goal is to understand and analyze price behavior and trading volume in the market. So the factors that can affect What is liquidity mining, include:
Popularity of Crypto Trading Project
This reflects the level of community interest in the coin. More popular coins attract more people’s attention and trading.
An example can be taken from the top 10 cryptocurrencies with the largest capitalization today, of which 5 are in the top 10 with the largest trading volume in 24 hours.
Community Hype Affects What is liquidity mining
The Hype factor only partly reflects the interest of investors. However, it also applies to unpopular assets. For example, previously no one was interested in SHIB (Shiba’s token). DOGE became a FOMO phenomenon. At that time, SHIB became the next token to attract many people to participate in trading. This brought SHIB into the top 10 coins with the largest trading volume in a day.
Reputation of Crypto Trading project
Not all reputable projects are liquid by definition. But most reputable projects tend to have good liquidity. This is understandable because when a project is serious, the community will show support.
How to check What is liquidity mining
We can clearly see that liquidity plays an important role in trading decisions. It reflects the ease of buying/selling or importing/exporting a particular coin.
Therefore, it is important to assess liquidity through the following three factors:
- The magnitude of the trading volume within 24 hours.
- Depth of Order Book.
- How are the buying price and selling price different?
This information will help you make smarter and more effective trading decisions in the cryptocurrency market.
Crypto Trading Volume in 24 Hours
Trading volume tells us how liquid the market is. It also provides data on past trading volume. This is also important information for predicting future price behavior.
You should consider which exchange is trading the most coins. And whether that exchange is on the list of Fake Volume or Wash Trading. Making quick transactions will be difficult because most of them are trading bots.
Order Book Depth
You should choose an exchange with a reliable trading volume. Then, you need to check the depth of the Order Book on the exchange for the coin you are interested in. This helps to assess the liquidity level when you need to make a transaction with the desired volume.
For example, let’s say you want to sell 100,000 Coin A at $0.1 per coin. The Order Book Depth of Coin A shows:
- At $0.1, only 40,000 A coins are available.
- At $0.09, there are 60,000 more A coins.
You can evaluate the spread and liquidity of the coin yourself. Furthermore, you can evaluate the transaction speed you can achieve.
Bid-Ask Spread
Crypto trade indicators -Ask Spread is the difference between the latest bid and the asking price shown on the order book. The higher the Bid-Ask Spread, the lower the liquidity of the coin and vice versa.
For example, here is the Bid-Ask price of the DOGE/PAX pair on Binance. You can see that the most recent buy price of DOGE is 0.0025293 PAX. And the most recent sell price is 0.0026798 PAX.
If you place a buy order for DOGE at 0.0026798 PAX and can only sell it at 0.0025293 PAX, you will incur a loss of ~6%. Liquidity is also affected by many other factors.
See more: Instructions for opening an MEXC global account
Should you invest in a Crypto Trading coin with high or low liquidity?
When investing large amounts of money, choosing a project with high liquidity is the most reasonable choice. The goal is to avoid the risk of too much price deviation. Imagine, if you buy an order and the asset price increases by almost 5%. At the same time, there is a high risk that a large amount of selling will occur later.
However, if you see a project with potential but low liquidity. There are two ways to fix it as follows
- Split your buy order into smaller orders to minimize the impact on the price. Consider buying a portion of it at the same time. Then watch the coin’s performance to see if you should buy more when the price drops.
- Choose to use decentralized exchanges (DEX) with high liquidity.
Epilogue
Liquidity is always extremely important in any market. A lack of liquidity means that the market has difficulty developing. That shows that many current coins lack liquidity, even though the profit potential can be very attractive. Above are the basics you need to know about What is liquidity mining. For Crypto Trading to answer your questions thoroughly, then don’t miss our official website.
FAQ about What is liquidity mining
How to participate in Liquidity Mining?
To participate in Liquidity Mining, users need to provide a pair of assets (e.g. ETH and another ERC-20 token) to a trading pair on a DeFi exchange. They then receive LP tokens (Liquidity Provider Tokens) representing their ownership in that liquidity pair.
Some risks to watch out for in What is liquidity mining?
Although Liquidity Mining can bring high profits, it also comes with risks such as Market risk, Protocol risk, and Liquidity risk.
Are Liquidity Mining and Staking the Same?
Liquidity Mining typically involves providing liquidity to a trading pair and receiving rewards for trading. However, Staking typically involves holding a certain amount of a token in a wallet to support the network and receive token rewards from the network.
