What is liquidity in cryptocurrency

WHAT IS LIQUIDITY IN CRYPTOCURRENCY

Liquidity plays a crucial role in the cryptocurrency community. The ease and speed of transactions with digital assets depend on its level. For example, cryptocurrency can be purchased with minimal losses due to higher trading volume and a smaller gap between buying and selling prices.

On the other hand, the lower the liquidity of an altcoin, the higher its volatility. You may have noticed many small-cap coins on DEXs. Buying and selling such altcoins can be challenging because they are traded by a narrow circle of traders. Moreover, such coins are often pumped by market makers.

Thus, liquidity allows you to easily assess how simple it is to make a transaction in cryptocurrency. The question remains as to what can influence its level.

FACTORS AFFECTING LIQUIDITY

Let's look at what factors can affect the volume of liquidity in cryptocurrency.

CRYPTOCURRENCY REGULATION

The laws and regulations of certain countries can significantly impact the level of liquidity in cryptocurrency.

For example, in many countries, trading and circulation of cryptocurrencies are prohibited. Such bans can seriously affect the cryptocurrency market by making the exchange of cryptocurrencies illegal.

TRADING VOLUME

Arguably, the main factor affecting liquidity is the trading volume. This, in turn, depends on the number of people engaging in various activities in the crypto market.

Trading volume is the number of tokens bought or sold over a specific period (usually within 24 hours).

Trading volume indicates the peak market activity of a specific token. The higher the volume, the greater the involvement of buyers and sellers in the asset.

CRYPTOCURRENCY ADOPTION

Undoubtedly, the success of cryptocurrencies depends on their recognition by entire states as well as institutional investors. For example, with the launch of Bitcoin ETFs, a new wave of liquidity entered the cryptocurrency market. In turn, market makers such as Blackrock and Grayscale are now some of the leading liquidity providers for the first cryptocurrency.

Moreover, to increase liquidity, many crypto projects create convenience and utility in everyday life. For example, there is now a growing number of organizations using digital assets as a means of payment.

CRYPTOCURRENCY EXCHANGES

The more exchanges that offer trading opportunities, the higher the liquidity. The growth in the number of cryptocurrency exchanges aims to meet the numerous demands of users.

Thus, a large number of exchanges can increase market activity by attracting more users. The influx of new players into the market increases trading volume and, along with it, liquidity. Some of the most popular CEX exchanges are: OKX, Bybit, Binance.

HOW TO DETERMINE CRYPTOCURRENCY LIQUIDITY

There are at least two methods for measuring the liquidity of digital assets on cryptocurrency exchanges.

The most well-known method is counting the number of tokens bought and sold over a certain period. The higher the trading volume of the specified tokens, the higher their liquidity. It is important to remember that the 24-hour trading interval does not always indicate high liquidity. This is because trading volume can increase or decrease due to a bullish or bearish trend.

The second method for measuring liquidity is the spread between the buy and sell price. This difference can be found by calculating the highest bid price and the lowest ask price. As a rule, exchanges with a low spread provide greater liquidity than exchanges with a high spread.

WHY IT IS IMPORTANT TO STUDY CRYPTOCURRENCY LIQUIDITY

High liquidity in cryptocurrency ensures price stability and lower volatility.

In turn, volatility describes the price changes of a cryptocurrency. The higher it is, the riskier the asset and, accordingly, the less liquid it is.

!!! NOTE: please conduct your own research before purchasing assets (DYOR)

Tokens with high liquidity allow traders or investors to make more accurate predictions, which enhances the validity of decisions and adherence to risk management principles. Moreover, high liquidity of digital assets makes price manipulation by a select group of individuals much more difficult.