When you are trading on BitMart Futures, it is important to understand the ‘liquidity”. You can read it from “the spread” between bids and asks, the depth of the order books, and how market orders can cause slippage on the order books.
What is liquidity?
Liquidity generally refers to the ease with which an asset can be exchanged for cash without affecting the price of that asset. This definition has two aspects to it: ease (speed and effort required) and price (slippage, or the difference between the expected price and executed price, on a large order). When considering liquidity within the context of crypto exchanges, both components are critical — a trader needs to have transactions completed as quickly and cost-effectively as possible.
How to measure liquidity
Order Book is a ledger containing all outstanding orders – instructions from traders to buy or sell cryptocurrency. An order to buy is called a “bid” and an order to sell is called an “ask.” Bids and asks are paired up as soon as their requirements are fulfilled, resulting in a trade. For introductory purposes there are two primary order types to know:
Market order – buy or sell immediately for the best available price. These orders are filled by immediately pairing buyers and sellers with orders currently in the books.
Limit order – buy or sell a set number of bitcoins at a specified price or better. An example order would be： Bid price $6695 to buy 15280 contr of BTC/USDT contract.
Spread is also known as the bid-ask spread, is the distance between the maximum price someone is willing to pay (bid) and the minimum price someone is willing to sell (ask). As shown in the picture above, here’s what the bid-ask spreads look like for BTC/USD contract on BitMart Futures is 6696-6695= 1 USDT.
【take away】Bid-ask spread should be a negative function of liquidity. Bid-ask spreads will shrink whenever there is more liquidity.
Depth, also known as Order book depth, is the total amount of limit orders on the order book. The calculation for depth is simply the cumulative volume of the base asset at various percentages from the mid-price. For example, the “Bid Volume 1%” for BTC/USD contract on BitMart Futures would represent the volume of all bids orders falling within 1% of the mid-price. To calculate the depth, we would add up the volume of all bids placed within this 1% price range. Conversely, the “Ask Volume 1%” would be the volume of all asks. Here below, the +- 1% depth is 1.9 M+ 1.94 M = 3.94 M, You can also choose to calculate a +-2%, +- 3% depth.
【take away】Depth should be a positive function of liquidity. The bigger the depth, the better the liquidity.
Slippage is the difference between the expected transaction price and the actual transaction price. If you want to execute a large order, there may not be enough interest at the desired price level to maintain the expected price of a trade. The difference between the expected price of a trade and the price at which the trade is actually executed is known as slippage.
【take away】Slippage should be a negative function of liquidity. When liquidity is low, you should expect to see more slippage and vice versa.
Why is liquidity important
Fundamentally, lower liquidity leads to less stable prices for an asset, meaning that slippage and price manipulation are risks in low liquidity environments, but also, dips in price can be turned into flash crashes. The lack of market participants can lead to long waiting times, which especially during a market swing can be detrimental to a trader. For a good trader, the most important thing is to understand exactly how liquidity is impacting your trading and to have a coherent strategy that takes these factors into account, deliberately choosing assets and exchanges with an appropriate liquidity environment.
ATTENTION: Cryptocurrency investment is subject to high market risk. Please make your investments cautiously. This is not investment advice, or an endorsement by BitMart as to the intrinsic value of a digital asset, or a commitment by BitMart team to support any speciﬁc asset/token that the announcement pertains to.