![Illiquidity - a problem nobody talks about yet affects everybody. [SERIOUS2] [NOMOONS]](https://b.thumbs.redditmedia.com/Bd4Vs7q9Wd-LO-FTVxuOkAzwU8z10sxLukTIEGM7b-c.jpg "Illiquidity - a problem nobody talks about yet affects everybody. [SERIOUS2] [NOMOONS]") | Disclaimer for the feds: I never owned any crypto, never traded any crypto, never made any profit and this post is purely for entertaining purpose only. This is not a financial advice. Introduction Illiquidity is rising every month across all exchanges. Market makers are pulling out due regulatory risks and the lack of interest makes the entire process less profitable.More and more larger institutions but also retail investors are pulling out their assets from exchanges ( for good reasons ) and the decline in prices causes an outflow of assets from the order book into wallets to hodl until better times. But why does it matter for you ? Because there is a chance it currently affects every single order you place and this post might save you from heavy losses but also helps you gain more profit. Illiquidity - Liquidity... what's that?Illiquidity is the used term to describe an asset that lacks in liquidity. Liquidity on centralized exchanges is usually provided via the order book mechanic of traders & Investors placing orders at multiple prices around the current market value. Visualized on a heatmap you can see how Liquidity has a huge impact on price action. This is how simplified the "deeper level" of a chart looks like of an asset when including liquidity via "blocks of supply". During the smaller pump yesterday on the BTC/USDT pair you can see how it always struggled a bit reaching those blocks. Market MakerIt's important to understand what a Market Maker is. Without getting too much into the details a quick easy summary is a Market Maker provides the sell & buy Liquidity for an asset on an exchange so you can buy quickly but also at the given current price. Market Makers have no bias. They don't profit of a price going up or down they simply profit of the spread the combined investors & traders take. They usually buy an asset a bit cheaper than current price and sell for a bit higher. The biggest Market Maker on Binance for example are Wintermute, Jump, GSR, Keyrock and Jane Street. Example: the -20% dip on multiple alt coins within minutes and why it happenedA few weeks ago across the alt coin market multiple asset fell within minutes by -15-30%. The above screenshot was taken while it happened since I was trading the volatility. Look how incredible quíck it fell on the Minute chart but also recovered equally fast. All happened on fairly low Volume for such volatility. The reason is that the order books across all exchanges especially for alt coins are illiquid. Nobody really expects huge volatility anymore to happen 24/7 since markets have become more calm since the creditor wipe out a year ago. What used to be common for crypto assets & alt coins to jump 5-10% a day is now an extremely rare case. During that "collapse" the global BID/ASK metric dropped by over 20%. The cause are market makers pulling out their bids when heavy sell pressure gets applied. And you can probably think why that was the case - they don't have a bias. They won't catch a falling knife becasue they don't believe in a recovery of any asset. If there are no other bids, they won't bid themself. The Orderbook was illiquid, they pulled their bids, the huge seller sold into the market of barely any existing bids -> the price dropped heavily. ( This also happens btw on global macro news and is the reason why even an asset like BTC sometimes jumped 5-8% on CPI number releases ) looking at more Data we can see a large liquidation of $1.8 Million USD just in long positions during that sharp dump pretty much wiped out all higher leveraged trades. Additionally, stop losses triggered and also sold into the illiquid market. Simplified a liquidation cascade happened. Everyone sold into no liquidity taking a massive loss before traders & investors noticed and deployed capital to buy the dip. Market orders and the "no fees" lieA very popular type of order used by retail investors is the "market order". It basically executes immediately and uses the given liquidity on the open market. Some might already notice where this is going. Market Makers but also scalping traders are using these market orders to profit of the spread. Although Exchanges left and right lure in liquidity with their "0% fees" or "almost 0% fees" offers, you still might take a heavy hit on spread bigger than simply using a limit order. Ask yourself, what's the point of having a 0% fee when your order takes a 0.1% hit on spread? But that is just an example of a more liquid asset. It gets way worse for illiquid assets or situations. Let me give you some recent examples: EDU/USDT pair on MEXC EDU/SDT pair on Binance Notice the difference? A seller decided to use a market order throwing all his EDU on the market right after the pump to take profit. They ate such a high spread of -3.53% that they actually sold some at prices BEFORE the initial pump. There are also way more whicks on Binance due larger orders hitting the market during illiquidity. All those whicks are most likely losses to spread. Across all exchanges there was no reason to take such a hit It also happens with top market caps high interest CryptoExample: Litecoin LTC/USDT on Binance LTC/USDT on other exchanges ( ByBit ) There was no reason for a trader to take such a massive spread on purpose visible across all markets. Yet a larger entity used an instant order, drained out the entire liquidiity of the order book and ate an incredible -10.56% spread. Volume spiked heavily caused by Bots & Arbitrage traders to take advantage of the spike**.** Afterall they got lucky the price actually rallied after so the spread turned out to be still profitable but imagine the prices declined further. My personal guess is it was a short position covering trying to close it all at current market price but unintentionally ate the spread. Interesting... but what can I do to protect myself?Try to avoid using market orders as much as you can it's simple as that. Try to use only Post-Only orders ( which is a method to only execute as maker order / limit order ) or use Limit Orders in general. You won't eat slippage on selling at a specific price if you set the price correctly. It will only fill at the set price and not lower. A market order is "searching" for liquidity to execute your order as fast as it can. Same goes for buying orders. Try to avoid using stop losses on small market cap assets. This might sound crazy and I definetly do not want to recommend to NEVER use them. Stop losses are key to prevent heavy unintended losses on a position. But they are at the end still market orders and when volatility hits the market during illiquid times there is a very high chance your stop loss order will be triggered in a quick short down whick right before it recovers. ( exactly as shown above with MATIC/USDT )Good alternatives are buying on spot and simply holding no matter where prices go. Advantage is here using only money to invest that you can afford to lose to go towards $0. You won't need a stop loss if you don't care about your assets going to $0 because you believe they'll recover eventually. Simplified, for traders i can recommend using isolated trades and adjust leverage in a way it reaches your original planed position size. A full liqudiation where you don't expect prices to hit and fully confirms your trade to be wrong. There's way more to this so I highly recommend to only do this if you are a professional trader knowing exactly what you do. If you are, you'll probably know what I'm talking about. It will also help you not re-enter a trade just because your stop loss triggered. Test it yourself!You can also test this entire topic by using a market order on purpose and pay close attention to the realized & unrealized profit numbers. There is a high chance ( you might've already seen it a lot ) that the position or order is immediately in a loss. That's because the Market Maker has thrown a higher spread at you. This might not be that important if you buy in medium sizes BItcoin during high trading hours but this can even make a large difference on small orders on illiquid tokens. ( A good example are moons Btw ) If you want to execute a larger order on an illiquid asset or small market cap coin but not make it visible with a Limit order to prevent others front running there are also very good ways to sell without eating large spread. Ask your friendly local trader for help since this is a bit off topic. The endI hope this post explained the recent huge dip on alt coin assets and maybe explained how Market Makers use spreads to profit of any position you take. This is very simplified and there is way more deeper knowledge of how market makers use Stop Limits and other orders to move prices but that's a different topic. If you have questions feel free to ask I hope I can help. [link] [comments] |
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