Understanding Crypto CFD Liquidity – Why it is Important?

Trading contract for differences (CFD) entails buying or selling an asset without actually holding the asset in the underlying market. Similarly, in crypto CFD trading, market participants don’t actually own any cryptocurrency in their wallets, but they trade based on speculations alone.

Crypto CFD traders rely on their expectations of the possible market movement and open trading positions. Many new traders follow this strategy to dip their toes in the waters of the crypto market, where they don’t need to transfer any actual coins to their crypto wallets.

Since CFD trading means quickly trading assets without owning them, liquidity is vital in making the asset highly accessible and with the market price. Therefore, if you are looking to hire a crypto CFD broker, here’s what you need to know.

Understanding Liquidity

Liquidity refers to the asset’s availability and accessibility in the market. Thus, a highly liquid asset means traders can buy or sell the asset quickly and with a minimum price fluctuation from the market value.

This results in a small difference between the bidding and asking price (low spread) and minimum price slippage.

The crypto market is relatively new compared to established markets like stocks and currencies. Therefore, liquidity can be questionable, making it challenging to trade crypto CFDs with so much ease.

The Importance of Asset Liquidity

Cryptocurrency prices move rapidly, and a few seconds can alter a coin’s market value. Therefore, if an asset is not liquid enough, there is a risk of being stuck in the trade because there are not enough traders willing to buy and sell with you.

Eventually, in these few minutes or seconds, the market may move against you, and you lose the position you initially wanted.

Therefore, trading a highly liquid asset makes it easier and faster to open and close trade positions simply because enough traders are willing to buy and sell with you.

Crypto Liquidity Aggregation

CFD brokers use a crypto liquidity aggregation strategy to offer trading opportunities with fast execution and low spreads. Using this strategy, a broker may gather the prices from different exchanges and offer competitive prices to the traders.

Additionally, liquidity aggregators use a “market maker – market taker” strategy to enable trades with fast execution. By that, they invite liquidity providers to ensure enough liquidity for the asset in question.

In return, brokers offer a “taker fee” to liquidity providers from the “maker fee” commission they make on each trade executed.

Measuring Liquidity in CFD Trading

Liquidity in the CFD market can be measured in different ways, and most market participants use the following terms as indicators for liquidity:

Spread

The spread is a major asset indicator, referring to the difference between the asking and bidding prices. By that, when an asset has a low spread, it means it’s highly liquid, and a sufficient amount of traders are ready to buy and sell with you.

On the other hand, a wide spread means that not many traders are willing to buy and sell and that the asset has limited liquidity, making execution a bit slow with possible price slippage.

Volume

The number of trades taking place in the market, or the “volume” of trades, is another parameter that indicates liquidity. High volume means many traders are participating in the trading activity, and the asset is highly liquid. 

Order Book

You can also check the “order book”, indicating how many trading orders were placed in the market. Therefore, if you find plenty of placed orders in the market, it means enough traders are ready to buy and sell, which indicates high liquidity. 

Choosing The Right CFD Broker

Finding the right crypto CFD broker can be challenging, and you need to look for a broker that offers high liquidity with competitive rates using the asset you want. Therefore, you need to consider the following.

• Check the spread they offer; look for the tightest spreads, indicating high liquidity and quick trade execution.
• Check the minimum slippage time and average execution time, especially if you want to trade with low-liquidity assets.
• Make sure there’s a high volume in the market where you want to trade, and make sure there’s a high volume to ensure high liquidity.
• Look at the order book and ensure check out the number of traders placing orders. A highly liquid asset has many traders ready to buy and sell.
• Check the broker’s experience in providing liquidity. This can tell you a lot about the market (maker-taker) dynamics. 
• Take a look at the broker’s working experience and read the review about the broker in general and liquidity providing in particular.

Conclusion

Finding a highly liquid crypto CFD broker is challenging, considering the relatively new crypto market. Also, considering the high volatility and fluctuation of most cryptocurrencies makes it hard for brokers and traders alike.

However, this high volatility can be profitable for you. So, you must ensure the broker matches a few criteria before trading crypto CFDs.