What does reducing liquidity mean (benefits of reducing liquidity)?

08/15/2023 09:18 • Digital Disruptors • 55 views

What does reducing liquidity mean? According to official sources, what does reducing liquidity mean? Reducing the liquidity time is achieved by increasing the quantity of liquidity. In simple terms, it means reducing liquidity without changing the price. This can be understood as if the price of a trading pair fluctuates too much or is not adjusted properly, then that trading pair is excluded; on the contrary, if in a market, a decrease in the price of a trading pair leads to more costs (such as slippage) and the price continues to rise, then the entire market will undergo changes.

Benefits of reducing liquidity

In the past few months, the cryptocurrency market has experienced significant volatility. According to data from Skew, the current trading volume of the Bitcoin futures market is 277 million USD, while the average weekly trading volume of Ethereum futures reaches 344 million USD.

Although there are still significant price differences between these two assets (like other assets), reducing liquidity is profitable for the cryptocurrency market in some sense. Does “lower price” attract investors? If this situation continues, we may see further price declines, making it useless and expensive over time.

Although liquidity is low, it also has some benefits: it can help investors reduce positions while increasing leverage. In addition, “liquidity providers” can also obtain higher returns. For example, when users buy ETH, they can earn more fees. Therefore, even if these tokens are now seen as stable products or alternatives, it may still cause “overflow”.

Reducing rates has the benefit of reducing risks, which is one of the important means of capital cost, as funds are usually sold through exchanges. On the contrary, in order to avoid high transaction fees, people need to transfer capital to cheaper markets. Due to the bear market in the cryptocurrency market, investors cannot afford to incur losses and utilize their asset exposure to protect themselves from potential economic losses. Therefore, “arbitrage” (such as shorting) may be another option chosen by strategists.

However, in a recent meeting, an economist posed a question: “How do you know how to allocate a small portion of your investment portfolio to the market?” He pointed out that this model has three key elements: 1. Increase the level of liquidity, 2. Improve market liquidity, 3. Increase leverage, 4. Reduce risk, 6. Reduce transaction slippage, 7. Increase transaction speed, 8. Reduce liquidation ratio, 9. Reduce liquidity and liquidation ratio, 10. Improve liquidity and liquidation ratio, 11. Reduce transaction costs, 12. Improve liquidity and liquidation ratio, 1. Eliminate market friction, 8. Optimize price discovery system.

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What does reducing liquidity mean (benefits of reducing liquidity)?

Benefits of reducing liquidity

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