The BOTS liquidity model
February 17, 2022

The BOTS liquidity model

BOTS applies the so-called liquidity model to maximize the growth potential and minimize risks. What is this, and why is it important?

The BOTS liquidity model

BOTS wants to make sure that everyone in the world has the opportunity to build a second, passive income through investing. To do so, we need the help of our bot creators, who make intelligent trading bots for our users. BOTS applies the so-called liquidity model to maximize the growth potential and minimize risks. What is this, and why is it important?

Trading volumes and liquidity

To understand what liquidity is, let’s have a look at CoinMarketCap. We find interesting data on this crypto price website, like price, price change, and volume. When we sort the markets from highest to lowest trading volumes, we see that the biggest cryptocurrency (Bitcoin) doesn’t always have to be the most-traded asset.

Below you find an image of CoinMarketCap where XRP is topping the list of most-traded crypto assets and thus has the highest trading volume. Do note that this figure can change in a matter of hours. For example, the trading volume can spike heavily when big news regarding a specific cryptocurrency comes out.

Liquid vs. illiquid

What is the effect of a cryptocurrency having a lower or higher volume? For example, let’s say you (or, in this case, your bot) have a million dollars worth of Bitcoin to sell. As Bitcoin is a relatively big market, you’ll be able to sell your Bitcoins quickly as many people are bidding to buy Bitcoins.

Below you see an example of the Bitcoin order book. You see that per price, the value of the bids is high. For a price of $45.310, there are bids worth $126.000 and only $10 lower, at $45.300, there are bids worth $500.000. So, you could already have $626.000 worth of your $1 million sell order filled for only a minor price difference. You will move down the ladder until your position is completely sold.

When we take a not-so-liquid market, say Cake, this is a different story. Below you find the order book of Cake, and looking at the bids per price, we see that Cake may cause some problems. Selling $1 million worth of Cake with these relatively lower volumes means you will have a more challenging time selling it.

In practice, you and your $1 million worth of Cake may end up in a scenario like below:

  • First, you sell $5,1K of Cake for $27,61;
  • Followed by another Cake sale of $2,3K for $27,605;
  • Followed by another Cake sale of $1,2K for $27,600;
  • Followed by another, and another — only to end up with at least 70K Cake left in your crypto wallet…

Selling large positions in a market where the volume is low leads to you influencing the price. The selling pressure causes the price to drop, which is disadvantageous for your trade. In the worst case, during a market crash, you end up stuck in your position while you see the price tumbling down.

The BOTS liquidity model

To prevent this worst-case scenario and ensure that your bots can maximize profits, BOTS applies the liquidity model. We use this model to ensure that the markets your bot is trying to trade in are liquid enough. The ultimate goal here is to maintain our quality standards, protect our users’ and maximize the profits your bot can generate based on its particular strategy.

In practice, when your bot sends BOTS a signal to execute a move, our system will automatically check if the market your bot is trying to trade in is liquid enough and meets our standards. So, when there is a big market crash, your bots will always be able to exit their positions quickly while minimizing slippage.

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