Notes from a Novice Trader: What I Learned about Liquidity (So Far)

With my coverage of the 3 HIVE DEXs out of the way, I can go back to learning about trading (at least at a fundamental level). Technical Analysis is important, as is understanding terms and definitions. Just as important is knowing basic concepts such as liquidity. Although I'm not sure how much there is to learn about liquidity, the first lesson I learned could have come in handy for me when I bought some of the lottery tickets among the Layer 2 coins on Hive a couple of weeks earlier. This is what I learned about liquidity.

Definition of Liquidity

According to Investopedia,

Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.

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This matches pretty much what @forexbrokr had told me in a reply to one of my comments at the 18 November 2021 edition of the Daily Crypto Markets Live Blog:

What determines the size of the spread between BID and ASK? It's just liquidity.

High spreads mean that there aren't a lot of tokens being traded, so the buyers and sellers haven't efficiently met in the middle yet.

What does it mean when the spreads are virtually non-existent or small or average or spread-eagled?

If spreads are small, then you have a more liquid and efficient market. This is the ideal outcome.

If spreads are large, then it's inefficient and makes it extremely hard for people to trade. This is bad.

All that matters is giving people the opportunity to quickly trade at a fair price.

To do this, markets need liquidity.

Whether it's humans or bots, it doesn't matter - A liquid market is always the ideal outcome.

An Example of a Tight Spread

Earlier this week I received JAHM tokens for the first time. My interests and goals don't align with those people holding JAHM have, so I went to LeoDex to sell them. Before receiving them, I wasn't sure what to think about JAHM as a Layer 2 token. After the reply from @forexbrokr, I determined that JAHM is one of the better tokens at Hive Engine. Below is a screen capture I edited for file size and screen size as well as comments:

The relevant detail is the spread between BID and ASK for JAHM. The table below comes from the edited screen capture above:

A spread exists between BID and ASK for JAHM, but it's so low as to be effectively zero. This is about as tight a spread as it can be in USD, and it's a tight spread in HIVE. This indicates good liquidity, and it takes lots of people (whales or no whales) to make that happen:

JAHM was very active on that day, and cost to me was minimal.

Questions about Liquidity

There are ways to determine if a market for a crypto (or even a physical good, for that matter) is liquid (with small or smaller spreads) or illiquid (with large or larger spreads). The most obvious is the price difference between BID and ASK.

From a crypto's Market Data page (in this case, from one of the 3 HIVE DEXs), what other indicators can I use to determine how liquid a market is?

• 24-hour Volume is shown along with BID and ASK, so I'm guessing it's related to liquidity. High volume (or at least higher than normal volume) can be a good thing, although not always. In terms of liquidity, what does 24-hour Volume indicate?

• The charts themselves can say things about a crypto's liquidity, but I don't know how to interpret them from that angle. Out of the 3 chart types used at LeoDex (Candlestick, Depth, and Volume), Candlestick seems to be the best chart for determining or analyzing liquidity. For an established crypto (one with 60 days or at least 60 candlesticks), unexpected gaps in dates can't be a good sign. I'm guessing the date gaps indicate lack of liquidity.

• Buy and Sell Orders tell a story, otherwise they would not be included ona Market Data page. What stories do they tell, and what do they say about a crypto's liquidity?

For Open Orders and Trade History**, what do those indicate about liquidity for a crypto?

Just My Two Sats

For anyone looking to buy Layer 2 tokens for any reason-- solid fundamentals, belief or faith in a project, momentary need (as for liquidity pools), lottery coins, even ape-ing into a bag-- knowing how the liquidity staus of the token is crucial. I've bought Layer 2 tokens for all those reasons.

The reason to understand liquidity isn't because of the buying; we always buy at whatever the price happens to be at any given moment. The reason to understand liquidity is because of the need to sell: a tight spread means minimal costs (since the DEXs make their money based on the spread).

Some tokens are great buys but lousy or painful sells, and some of the lousy ones can't be sold at any price. I found this out the hard way, and that's HIVE I won't be getting back. My trades are trivial in comparison to those of most Hivers, but bad trades still hurt. The best I can do is liquidate the bad buys in order to make better buys. And doing that requires 2 things: liquidity, and a better understanding of liquidity. I know about the former, and I'm working on gaining the latter.

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