Liquidity is an important concept for any tradable asset from the real estate market to cryptocurrency.
What is Liquidity?
Liquidity demonstrates an asset’s ability to be sold or bought for the price that reflects its value. To put it more simple, liquidity indicates the ease of converting an asset to cash.
What is market liquidity?
Market liquidity, on the other hand, is the ability of the market to absorb a considerable amount of trades without generating extreme price shifts. Higher market liquidity benefits investors by resulting in lower volatility and transaction cost.
What is liquidity in terms of crypto?
When it comes to digital currencies, liquidity indicates the capacity to convert crypto-assets to cash.
What Affects Liquidity?
Despite crypto coins being so popular and talked about, they are still an emerging market. Small and less developed markets usually are less liquid compared to large global markets.
- Market Access
While smaller markets like cryptocurrency, mature, they seek investors from larger institutions. As markets become more global and the competition heightens, coins need to secure their positions as well as attract potential investors.
Cryptocurrencies are still not accepted in many parts of the world. Even though most countries impose crypto regulations in order to stop theft, fraud or other illegal activities, some countries have banned crypto coins altogether. In many of these jurisdictions, usage of crypto-assets is a crime punishable by a prison sentence.
As crypto coins become illegal in certain jurisdictions, their liquidity will drop. For instance, in January 2018, the tron coin price dropped from $0.254 to $0.03 in only a month.
- Trading Volume
The volume of trade is measured as the total number of trades made in a trading day. It is also among the most important factors that influence liquidity. The trading volume indicates how active the market of a certain coin is, so the higher the volume, more people are interested in the market.
- Trading Infrastructure
Generally speaking, investors have noted that technological improvements in a trading system can result in higher liquidity. Firstly, it is because trading becomes more efficient. In addition, the system becomes prepared for future market changes in volatility or volume.
- Retail Participation
It has been shown that in some markets retail participation is a major driver of liquidity. Increased retail participation helps to balance out institutional investors. A diverse set of participants in a market arguably has a positive impact on liquidity.
Why is Liquidity important?
- Stable market
High liquidity is a way to guarantee stability in the marketplace. When the market becomes illiquid and the volume decreases, it becomes easier to influence the price movements of crypto assets. Large swings like this can lead to great losses, however, with the right timing they can also bring great profits to investors.
- Improved transactions
In a liquid market, crypto transactions are faster, easier and more convenient. Because of the large number of market participants, the transaction time improves. In the fast-moving crypto trading market, time is very important for a day trader.
- Better pricing
Last but not least, when the market is liquid, prices are better because of the large volume of trade. In an active market, there is high competition so it ensures competitive prices too. Balanced prices signify a stable market and an advantageous environment for participants.
To conclude, liquidity is a crucial concept for crypto investors to understand. Crypto trading can be hard, but there are many ways to make it more enjoyable and convenient. A good example of that is a crypto portfolio tracker. If you don’t know how to use one, don’t sweat on it. Just take a look at the most thorough crypto tracker guide on the Internet!