Jul 08, 2019
How Cryptocurrency Exchanges Can Increase Their Volume and Liquidity

In the modern landscape, it is important for cryptocurrency exchanges to be diligent in attracting traders, as well as in having adequate liquidity with which to sustain them.

Previously, we discussed how cryptocurrency exchanges earn money. As intermediaries, earning a profit is often reliant on an exchange’s ability to attract traders and meet their expectations.

Cryptocurrency exchanges are able to earn money through offering tokens in IEOs (Initial Exchange Offerings), STOs (Security Token Offerings), and Initial Coin Offerings (ICOs). Regardless of the specific fundraising method, one universal truth remains the same: exchanges require an active trading volume in order to earn profit. This volume can be increased in ways such as:

• Attracting a large pool of traders to the platform.
• Encouraging existing traders to conduct more transactions.
• Leveraging instruments such as CFDs, futures, and/or perpetual swaps.

Types of traders

Generally speaking, there are two main types of digital asset traders that interact with exchanges: professionals (also known as informed traders) and amateurs (uninformed traders). The delineation between the two groups is important—while both types of traders are needed for an exchange to grow its volume, attracting them requires different approaches.

Professional traders

The ideal professional trader trades often, making them an active contributor to an exchange’s overall volume.

Examples of professional traders include, but are not limited to:

• Companies or individuals trading with their own money
• Wealthy individuals
• Hedge funds

Of these categories, hedge funds are often the best case scenario. In some cases, hedge funds can trade millions in digital assets in just a single day.

Professional traders can be reached through dedicated websites and online communities. Some examples include Telegram groups, Reddit communities, and even YouTube channels. Perhaps the most effective way, however, is through direct contact and networking. This can take place on platforms like LinkedIn, or through offline networking.

A key way that professional traders make money is through trading with amateur traders. Informed traders often find success over their uninformed counterparts. This relationship means that successful exchanges need to also have a significant number of amateur traders in order to attract professionals. Factors such as price scales or minimum price movements may be particularly of note to professional traders.

How to target professional traders

Professional traders tend to respond well to ecosystems that allow them to execute quick trades. Traders in this category are less likely to carry out manual trades, and far more likely to use some form of trading bot or tool.

More than anything else, however, professional traders are attracted to large pools of amateur traders. The presence of amateur traders tends to supply a stream of market orders that are likely to generate profit for professionals. This means that the best way to target professional traders is to attract a large amount of amateur traders and, as a result, generate a strong order flow.

Amateur traders

There are many potential reasons why amateur traders are not as informed as their professional trader counterparts. For example, they may not care about profit and prefer a particular exchange or asset for other reasons. Or, they may place strong emphasis on factors such as ease of use, local currency support, and simple KYC and onboarding processes.

These types of traders can be reached through common forms of marketing such as online advertisements, viral marketing campaigns, social network marketing, etc. Ultimately, this process does not differ much from generating leads in just about any other industry. It may also be beneficial to build a collection of contacts and engage with users in order to build a dedicated following.

Amateur traders are also likely to be exchange token holders that are eager to sell as quickly as possible. This may present exchange owners an opportunity to buy back tokens at a comparatively low price. If a strong channel for communication is formed, many of these traders can be influenced to partake in trading other speculative tokens, which can give an exchange’s initial liquidity a much-needed boost. Advertising the volume of trades that amateurs engage in can also attract professional traders to your platform.
ECNs, dark pools, and liquidity providers

From an exchange perspective, Electronic Communication Networks (ECNs), Dark Pools, and other types of liquidity providers are merely APIs to connect to. On their own, these tools do not help exchanges increase their volume.

However, being connected to these types of tools can mean increased liquidity when it comes to the buying and selling side of things. As a result, more traders could interact with the exchange, leading to an increased trading volume.

Implied orders

Implied orders are an advanced feature with the potential to multiply available liquidity on multiple instruments—without adding more capital. Here’s how they work:

If you have three trading pairs (for example, BTC/USD, ETH/USD, and BTC/ETH) then trading BTC/USD is considered the same as making simultaneous trades between ETH/USD and BTC/ETH. Exchange order matchers may also be smart enough to consider other pairs and infer implied orders.

As a result, an exchange’s liquidity is effectively multiplied out of thin air. This process can be likened to how banks generate funding through fractional reserves. If your exchange has increased liquidity, traders are more likely to interact with your platform instead of with your competitors. You can read more about how implied orders function here.