Importance of Liquidity
This guide to cryptocurrency liquidity takes a look at understanding liquidity at a deeper level, so as to familiarize oneself with the importance of liquidity as being one of the most pressing concepts in the cryptocurrency world. Liquidity represents one of the most important concept — aside from market capitalization — that everyone needs to understand when trading or investing cryptocurrencies.
Liquidity is the degree to which a particular asset can be quickly bought or sold without affecting the general stability of its price. In simplest terms, liquidity refers to the ability of an asset to be converted into cash easily. The most liquid asset in existence in cash, since it is very stable and can be readily accessed and easily spent on buying, selling, paying debts or meeting immediate wants and needs.
A common similarity among liquid assets is that they all have a ready and open market to be traded on. This means that all these assets are heavily traded globally in different exchanges with stable prices. For non-liquid — or illiquid — assets, they are usually not traded in public exchanges but are more commonly traded privately.
This means that prices of illiquid assets can vary by a huge margin and can take a significant amount of time to complete. Essentially, the harder it is for an asset to be turned into cash, the more illiquid it is. Liquidity refers to the ease in which you can enter or exit into a particular asset or currency. In the context of cryptocurrencies , liquidity refers to the ability of a coin to be converted into cash or other coins easily.
Liquidity is important for any tradeable assets including cryptocurrencies. A higher liquidity in the marketplace is preferred since it brings about the following advantages:. In a liquid market, prices are much fairer for market participants due to a large number of buyers and sellers.
For instance, a robust marketplace with high trading activity ensures that sellers would sell at competitive prices so as not to lose out while buyers would bid at higher prices according to their level of desperation , thereby creating an equilibrium market price that is equitable for all. A stable equilibrium price is a sign of market stability and ensures that market participants are not disadvantaged. High liquidity ensures that prices are stable and will not be prone to large swings in the market due to large trades.
A single buy or sell order would create large swings in the cryptocurrency prices, which contributes to increased volatility and risks for the general market. In a liquid market, prices are stable enough to withstand large orders due to the presence of many market participants and their orders.
You can quickly enter or exit a trade instantaneously, which is sometimes critical in the fast-paced cryptocurrency markets. Technical analysis refers to the study of past prices and the use of technical indicators and charting patterns to predict cryptocurrency prices. Though many disagrees with the accuracy of technical analysis , it is still a widely-used methodology in understanding the general market and trading.
Price and charting formation in a liquid market is more developed and precise, thereby enhancing its accuracy. Perhaps the core factor that affects liquidity in the cryptocurrency market is a fact that the majority of those who own cryptocurrencies engage in investing and trading coins for price appreciation rather than use them as a medium-of-exchange.
Volume refers to the amount of coins that have been traded in exchanges usually in the past 24 hours timeframe. Essentially, the volume reflects the market activity of a specific coin; a higher volume indicates that more people are buying and selling the coins. An exchange is a marketplace where assets are traded freely between buyers and sellers.
A higher number of cryptocurrency exchanges signifies greater market and trading activity since there are more avenues that individuals can get their hands on cryptocurrencies.
The increase in frequency and volume of trading helps to enhance market liquidity. There are currently over cryptocurrency exchanges, 21 decentralized exchanges and a handful of peer-to-peer P2P platforms in existence today.
There are many other exchanges that are currently work-in-progress and due to launch in the near future. The success and viability of any currency depend on the acceptance of the masses or at least a huge network of individuals that can actually use it for something. That is why it is important for cryptocurrencies to be accepted by merchants and businesses as a mode of payment, so as to increase the usability and utility of cryptocurrencies as a viable medium for transactions. Bitcoin and other cryptocurrencies are fast gaining traction and acceptance as a mode of payment, particularly in online stores.
The laws and regulations of different countries can also impact cryptocurrency liquidity. There are certain countries that ban either cryptocurrency trading or the use of cryptocurrencies in dealings. This would impair the liquidity in that specific country since a ban on cryptocurrencies equate to a ban on cryptocurrency exchanges, which would mean that it will be hard for users to buy or sell cryptocurrencies in that country.
Anyone looking to own cryptocurrencies would have to privately find a seller, or rely on peer-to-peer platforms. Therefore, the liquidity in that country would be extremely low. This usually results in higher prices since there are few sellers to cater to the high demand for cryptocurrencies, which gives the seller a higher bargaining chip to increase prices. In our next article, we will explore how you can use liquidity to your advantage when investing or trading!
If you're starting your journey into the complex world of cryptocurrencies, here's a list of useful resources and guides that will get you on your way:.
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Introduction to Liquidity
What are liquidity providers? They increase market figures 4. They earn on differentials and commissions 5. They have a wide range of services 6. Detailed study 7. How to reach an agreement with the provider 8. Why liquidity providers are needed 9. Other ways to increase liquidity How to find a market maker: results.
How will Encrybit Cryptocurrency Exchange Keep Liquidity?
Table of Contents
Is it regulated? Cryptocurrency exchange liquidity likes of CryptoBridge, EtherDelta, and many other decentralized exchange projects are in the development phase. Exchange cryptocurrency for fiat via a cryptocurrency debit card Cryptocurrency debit cards are similar to traditional debit cards. Although cryptocurrency exchanges had been around since the early s with the birth of the first digital currencies like E-goldthey became popular with the rise of Bitcoin and the following increased interest in the digital asset class. Those who decide to lend their cryptocurrencies, on the other hand, exchznge earn daily. Cryptowatch is a somewhat new trading site in the Bitcoin space. Ideally you should deposit on an exchange, make your trade, and then withdrawal the coins. Buy Bitcoin Piquidity, nor any of its owners, employees or agents, are licensed broker-dealers, investment advisors, or hold any relevant distinction or title cryptocurrency exchange liquidity respect to investing. Compare the rates of any exchange to other similar exchanges. But not every exchange can shoot token projects in the stars. The basic rule of thumb, when it comes to crypto exchanges, is that the bigger the platform is, the fairer pricing policy it offers. Still, the hack is scaring some people away.