Guide to Cryptocurrency Liquidity: Understanding Liquidity

Table of Contents

• What is Cryptocurrency Liquidity?
• Advantages of Cryptocurrency Liquidity
• Factors That Affect Cryptocurrency Liquidity
• Conclusion on cryptocurrency liquidity

     When it comes to buying and trading in cryptocurrencies, one must understand the term liquidity. It represents the degree to which an asset can be bought or sold quickly, without the general stability of its price being affected. Since (currency) cash is the most liquid asset in existence, the liquidity of an asset is determined by comparing it against cash. 

     A simpler way of terming liquidity, is the ease with which you can enter into an asset, and exit it as well, without the stability of its price being affected. That being said, what is cryptocurrency liquidity? Read on to find out, and learn much more.

What is Cryptocurrency Liquidity?

     Cryptocurrency liquidity refers to the ease with which a cryptocurrency can be converted into cash, or another cryptocurrency. When it comes to cryptocurrencies, as is the case with other assets and currencies, the higher is the liquidity of a cryptocurrency, the better it is. 

Advantages of Cryptocurrency Liquidity

     There are several advantages to cryptocurrencies with high liquidity, including the following – 

• Reasonable Prices

     A robust cryptocurrency market which consists of a large number of traders ensures reasonable prices. To put this into perspective, if there exists a market with high trading activity, sellers are bound to sell their cryptocurrencies at a competitive price, to ensure that they do not lose out to other sellers, who may sell their cryptocurrencies at a fairer price. This leads to a stable price of asking, and ensures that both buyers and sellers are not done wrong by. A standard price of asking is of the essence. 

• Stability 

     As the cryptocurrency world is fairly new in comparison to markets like Forex, and Gold, among others, individuals who purchase, or sell large amounts of cryptocurrencies can lead to the destabilisation of a cryptocurrency market, in illiquid markets. A single sell, or buy could create huge swings in the prices of cryptocurrencies, and this would affect market stability. A liquid market is able to withstand the effects of large orders, and protects its customers from potentially grave issues. 

• Faster Transactions

     The world of cryptocurrencies being volatile as it is, time is of the essence. A liquid market has a large number of participants, and this makes for easy buying and selling. You can enter and exit a market quickly, either entering into a new opportunity as soon as it presents itself, or exiting from a cryptocurrency, once you feel the time is right. According to NewsBTC, immediate edge bot review 2020, this is of critical importance, given the nature of cryptocurrency markets. 

• Technical Analysis

     It is easier to study technical indicators, price charts, and patterns for a liquid market, and the technical analysis derived from the same is more precise than that of an illiquid market. While you cannot accurately predict the prices of cryptocurrencies, you can study the behaviour of cryptocurrencies, and have a better idea of how a particular cryptocurrency may perform in the future.  

Factors That Affect Cryptocurrency Liquidity

     When it comes to cryptocurrency liquidity, the volume of trade in due course of a day speaks volumes of the number of people who are buying into a cryptocurrency, or exiting from it. Higher is the volume of trade in a day, or a period of consideration, greater is its liquidity. Since cryptocurrency trading and investing is more inclined towards reaping profits off, than as a medium of exchange, the liquidity of cryptocurrencies is affected.

     Similarly, a larger number of cryptocurrency exchanges with ensuing activity, indicates that more people are buying into cryptocurrencies. Regulations, and cryptocurrency acceptance too, impact the liquidity of a cryptocurrency. For example, if a Government bans a cryptocurrency, or cryptocurrencies as whole in a country, those who had bought into cryptocurrencies from that country, are no longer a part of the liquid market.

Conclusion on cryptocurrency liquidity

     The more the number of people trading in a particular cryptocurrency, the higher is the liquidity of that market. There are several advantages of a liquid market, and you must choose to trade in a cryptocurrency which has a liquid market, as it is likely to be active. You must stay up to date with the latest news surrounding the cryptocurrencies you want to trade in, or have already traded in, and act accordingly. 

     Similarly, you must look into regulations, and news surrounding Governments buying into, or banning cryptocurrencies as a whole, as this is likely to affect the prices of cryptocurrencies.