The concept of liquidity can be applicable to many areas of business, especially in finance. It is considered one of the good ways in measuring the health of a market. Besides volatility, trading volume and other indicators, liquidity is also an important factor. Without it, trading would be difficult to execute without resulting in a significant effect on the price.
What is liquidity?
Liquidity is the ability to easily convert an asset into fiat currency or cash as well as to another asset without any changes to its original price.
In terms of liquidity, cash is considered the most liquid asset. They can be used as a form of exchange, mode of payment and can be converted to other assets any time you desire. In the cryptocurrency world, where there is no certainty, there is one asset that can be considered the most liquid among them all – stablecoins.
Although digital currencies and stablecoins are not as widely accepted as compared to cash, as time passes by, more and more merchants have begun adopting them as part of the standard everyday payment.
In cryptocurrency, liquidity refers to how your crypto assets can be bought or sold, converted to cash or other forms of cryptocurrencies.
For all tradable assets like cryptocurrencies, liquidity is essential in establishing stability. Low levels of liquidity mean that the cryptocurrency is volatile and is susceptible to price spikes. On the other hand, higher liquidity means that the cryptocurrency is stable and less likely to experience frequent price fluctuations. For more information, check the Bitcoin Revolution app.
When trading, experts recommend buying and selling crypto in liquid markets as they have the most number of participants, which can give you greater chances to succeed. In addition, given its fast pace nature, you can also enter and exit a trade any time you please.
Factors affecting liquidity
Trading volumes. In terms of trading volume, one of the reasons that make the cryptocurrency more liquid is the number of people who hold, trade or invest instead of merely using it as a medium of exchange. Basically, volume refers to the total number of coins being circulated or traded in 24 hours. To put it simply, the higher volume or, the more people trading in a particular crypto market, the greater the liquidity.
Crypto Exchange. This refers to the platform that is being utilised by traders in buying and selling cryptocurrency assets. If there are a greater number of exchanges available, the activity in the market is greater as there are plenty of options that individuals can use. Greater liquidity is oftentimes dependent on the volume of trading and the rise of its frequency. As of today, there are approximately over 500 available exchanges in the market.
Regulations. Cryptocurrency being a decentralised form of currency means that there are no regulations from any central authority. However, there are some countries that have established laws and regulations that greatly impact the cryptocurrency market.
For instance, the banning of cryptocurrency in some countries can ruin the liquidity of that particular nation. Thus, it will lead to difficulty in terms of trading as some exchanges will not also work in those areas or regions. This problem will result in an increase in crypto market prices.
Adoption. Cryptocurrency’s value is dependent on the number of people who determine it. The greater number of individuals who use crypto, the greater the success and viability, that is why it is essential that merchants’ businesses accept cryptocurrency as a form of payment.
As of today, more and more business establishments have begun adopting cryptocurrency, which also includes renowned corporations such as Amazon, Microsoft, eBay, Paypal, IBM and Apple App Stores.
Crypto ATM Cards. Cryptocurrency ATM cards are becoming more popular and widely used these days. The trend continues to grow despite the wild price fluctuations. Bitcoin ATMs play an important role in wider acceptance from the people, especially for those who are not comfortable with doing transactions online. The only disadvantage is that making purchases through this mode costs more compared to exchanges online.
Importance of Liquidity
Why is liquidity important in the cryptocurrency world?
Basically, high liquidity should be given more priority since it garners improved prices due to the high number of participants in the market, particularly the buyers and sellers. It tends to create greater equilibrium due to the high level of activities in terms of trading.
Also, high liquidity ensures stable prices that are not prone to price swings that could affect the value of cryptocurrency.
Greater technical analysis is expected in a highly liquid market since they offer more developed and accurate pricing and charting formation.
In terms of liquidity, not all crypto assets are the same. Some crypto assets have better liquidity than others. This is mainly due to their market efficiency and their high number of trading volumes.
While some markets have hundreds to a thousand volumes a day, there are others that have billions. The cryptocurrency giants like Bitcoin and Ethereum have no issues with regard to trading volume. However, some cryptocurrencies with lower trading volumes may have lower or even lack liquidity.
This is important information, especially when you are new to the business or you are an active trader. This gives you the idea of where to put your money to. Of course, you would not build a position in cryptocurrencies that are illiquid if you don’t want to suffer great losses.
Bitcoin and other forms of cryptocurrency are known for volatility. Expect lucrative returns if you are a new investor. The problem in liquidity is one of the factors that affect the price of said digital currency. Sudden movements and spikes in prices are apparent. Improved liquidity of major cryptocurrencies helps reduce the risks.
Although the price is really hard to predict, as time goes by, Bitcoin is developing a strong foothold as its liquidity increases with time.
Risk note: Cryptocurrency is a volatile investment. It is recommended that you must learn how it works before you decide to invest. Investment requires high-risk tolerance as price fluctuations can be frustrating at times.