Who's Providing Liquidity to the Market and Why?

in LeoFinance3 years ago

Knowing the fundamental structure of the market is essential, understanding the primitives is what gives us an edge when betting against others. What people seem to disregard is the fact that the market is fucking savage, it doesn't care if you'll lose a house, retirement money, or something else. It's a zero-sum game, meaning that when one is winning, there has to be someone losing, otherwise, where would the money come from?

Trading is not easy, as there are too many variables to take into consideration, and even if done properly, there's no guarantee you'll end up being successful. Whenever emotions get involved in any kind of decision-making, there's slight possibility the actor might act irrational and reject technicalities. That's why it's hard to retain focus. I know what I'm talking about, trust me.

Now, what I wanted to cover for today is how the market works and what drives the liquidity and hype. If you're already involved in crypto you should have noticed how easy it is to make a hype via increased trading volume and price spikes - that's how you do marketing these days.

Regardless if we're talking about the traditional market, forex, stocks, or crypto, sellers must be matched with buyers and vice versa. Without meeting these criteria trading would be pointless as every participant would have to promote its product and hope someone actually needs it.

I believe it's important to understand that liquidity plays a vital role in the whole process, therefore, it's essential for us to understand it - no wonder why Uniswap and similar DEXes exploded this year.

What makes some asset liquid is demand, meaning that Bitcoin will get sold more quickly than Hive because there's a bigger demand for it. In that sense, we can state that Bitcoin is more liquid than Hive. To draw a more traditional parallel, an ounce of gold is a very liquid asset as it can be traded for money at any given time. Now, we can apply such a methodology to the whole industry.

A liquid market would stand for a market in which you can buy and sell assets for a good price in a relatively small period of time.

On contrary, the illiquid market will have no such properties, and selling your goods or services might be a more demanding task. To put it in simple terms, if you want to sell your asset, and there's no one interested, there's a high chance you'll just keep whatever you wanted to sell.

Market Makers

Many market makers are often brokerage houses or exchanges that provide trading services for investors in an effort to keep financial markets liquid, thus creating a playground for the wealthy participants. A market maker can also be an individual trader (known as a local), but due to the size of securities needed to facilitate the volume of purchases and sales, the vast majority of market makers work on behalf of large institutions.

It's a definition taken from Investopedia, so it doesn't exactly represent a real definition when it comes to the crypto market as crypto is by far less liquid (generally) - however, with the invention of AMMs a lot more people, regardless of their status, can yield transactions when keeping digital asset liquid.

In simple terms, I would describe market makers as individuals or firms that provide funds to make certain assets/stocks/crypto more liquid. If you ever traded anything online, you must have noticed that trades take longer to execute while some are traded instantly. It's no brainer to understand that more liquid markets attract more users. The more traders the better.

Market Takers

A market taker is a participant of the market, that is agreeing with the currently listed prices on the order book and wishes to fill his trade immediately. If the highest selling price and the lowest buying price is okay for you and you settle a trade, you become a market taker.

In essence, market takers take liquidity out of the pool as contrary to the market makers.

A market maker makes the order book and a market taker takes from an order book.

There are more and more tools being brought to help the development and prosperity of Hive Engine based tokens. For those who're not familiar with Hive Engine, it basically a smart contract platform built on top of Hive also referred to as a second-layer solution for anyone that needs smart contracts and wants to utilize the benefits of Hive as a feeless and fast blockchain.

By the way, @aggroed already created Hive-engine-based liquidity pools called Diesel pools where anyone can provide liq and get rewarded for contribution - not sure if the reward system is implemented yet, but if it's not, it will.

This is a big year for Hive where the whole sentiment changes.

I just hope we'll manage to fork BSC and make HSC with Hive as a native currency. The chain would be separated from the main chain and a new set of witnesses would be needed, however, it would bring a different/better vibe in terms of financial incentives/speculations combined with a strong community and social clubs.

Fun times bros, fun times!

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As for trading, I think the process is full of risks and the psychological factor is very important
So there is advice I always love: "Do not trade with what you cannot afford to lose."
As for liquidity, I think that it controls the market price in general. If liquidity decreases, then prices fall

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Ye, especially if you're new in the game, but there are traders that make a substantial profit over longer periods - but it demands a lot of research and dedication.

Not necessarily, but yeah, it's a sell signal for sure.

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