We watch the story unfold. Similar to the 2008 financial crisis, books are being written about the events that are happening on world markets today. But just like the 2008 financial crisis, collective industries will grow stronger together. It is more important than ever to convey information about the fundamentals of liquidity and what it means to global markets.
In its most basic premise, liquidity refers to the ease with which assets can be converted into cash without changing the market. In general, the larger the volume, the higher the liquidity and the faster the match between buyers and sellers.
The US Treasury marketplace is an example of this. Banks act as middlemen in the market, bringing buyers and sellers together. Traditionally, when the stock market falls, investors flock to the bond market as a safe haven alternative. This increased activity results in a highly liquid market where it is easy to match buyers and sellers as the difference between the prices offered by sellers and the prices sought by buyers is very small.
Today we are seeing a rare mismatch in this bond market due to the effects of the coronavirus. Sellers are dumping stocks and bonds, and many investors are defaulting. This creates a void that leads to an illiquid market where banks struggle to efficiently connect buyers and sellers.
Liquidity is the key to exchanging assets – whether bonds or digital assets – quickly, easily, and cheaply. Increased liquidity also helps increase the size or volume of trades that can be processed by dependent systems.
It follows that the liquidity surrounding the digital asset XRP is the lifeblood of Ripple’s on-demand liquidity (ODL) for cross-border payments. XRP can be sent directly, quickly and cheaply without the need for a central intermediary. This makes it a handy tool for linking two different currencies quickly and efficiently. As a bridging instrument in ODL, the higher the liquidity of XRP, the lower the costs and the risk of each transaction.
ODL’s continued growth has resulted in an increasing number of financial institutions, payment providers and market makers trading in XRP. The resulting increase in institutional trading volume has helped to further liquidate XRP, particularly in the ODL corridors – despite the recent market turmoil related to the COVID pandemic. As the ODL volume grows in the target corridors, institutional trading will of course increase as the ODL flows tend to be dominated by institutional parties and market makers.
This virtuous cycle of utility, trading and liquidity continues to build: the more XRP is traded, the more liquid it becomes and the more solid it can be used.
Bitso used the use of ODL and XRP to become the largest exchange in Latin America. The company’s chief financial officer, Barbara Gonzalez Briseno, says trading volume helped reduce the cost of transfers to the point where end users pay “a fraction of the (traditional) transfer fees” through the service.
The new growth in XRP liquidity will come from a variety of sources. New cross-border payment corridors and ODL partner exchanges calling for new currency pairs for XRP will help improve trading volume and the ability to trade between assets.
But non-ODL partner exchanges such as Kraken or Coinbase will also contribute to increased liquidity. As the exchange of non-ODL partners becomes more mainstream, larger institutional traders will begin transactions in XRP, making order books – including ODL order books – more liquid.
Identifying new use cases for digital assets outside of cross-border remittances will also deepen the trading pool and liquidity for XRP. When real solutions are solved with this technology, new, larger groups of traders are drawn in, resulting in even more volume and liquidity.
In simpler terms, it’s an ongoing benefit that promotes liquidity depth and market health around XRP. The more value transfer problems it helps to solve and which payment problems it helps to reduce; The more diverse and efficient the introduction of XRP as a global payment facility becomes.