ADSactly Crypto: What Is Liquidity In Cryptocurrency?

Cryptocurrency is still trying to find its feet in various industries and use cases. For the moment the majority of investing for profit and loss taking are done via exchanges as people trade it as a speculative asset.

A large part of cryptocurrency value at the moment comes from buying and selling it for various altcoins or fiat pairs and trying to ride peaks and troughs in the market with the intention of making a profit.

Price obsessed

If you're only into cryptocurrency for the money, then swing trading and day trading should be where you would focus your energies. You would hang out on exchanges and follow information regarding market and price changes.

You will see countless content, websites, YouTube channels and more solely dedicated to the price and price moves of cryptocurrencies and what that means for investors.

One of the critical factors in buying into a cryptocurrency as well as price changes is the amount of liquidity available. I'm sure you've heard this term before, so what exactly is market liquidity as it pertains to cryptocurrency, and how does it affect the price of coins?

Let's take a look, shall we!

Image source: - newsbtc.com

What is liquidity?

Liquidity refers to how much of an asset is available on the market for sale and the ease at which an asset can be exchanged (purchased or sold)for cash without affecting the price of that asset.

The more liquidity in the market the less chance of slippage, which means the price changes due to a large order going through.

For example, making a large order of STEEM buying could push up the price and you would get less steem for your buy-in
While on the opposite side, selling a large order could push the price down and get you less for your sale

Investors want to avoid slippage as much as possible and look at order books on exchanges to see how much liquidity is available at a specific price point before buying in or selling.

Why is liquidity significant?

In terms of cryptocurrency, liquidity is scarce and is a Marco problem for the entire space, if it weren't we would not see the massive price swings synonymous with space.

Stability and manipulation

You all know the term pump and dump? It's become famous during the ICO era and any shitcoins had high valuations due to their lack of liquidity.

An illiquid market can allow a single large actor or group of actors to manipulate the price for their benefit and then sell off to the next round of investors effectively playing hot potato with the coin to see who gets stuck with the loss.

The more liquid a market is, the more stable it is with plenty of traders on the other side willing to fill the buy or sell order with minimal impact on the asset's price.

Transaction time

When you have more buy and sell orders available you are able to fill orders quickly instead of having to wait for other traders to sell or change their orders to match yours to fill your order. This makes transaction times a lot faster and traders can execute orders strategically to take advantage of inevitable price swings.

The more liquidity the larget the orders can be and the bigger the payoff, making trading with high liquidity much more attractive.

Technical analysis

One of the reasons I believe TA (Technical analysis) in cryptocurrency is a load of rubbish is due to the lack of liquidity. When a market has more liquidity it offers tighter spreads and greater stability liquidity brings. This helps the price remain stable and charting formation are more reliable and developed and to an extent more precise.

In low liquidity environments, where large trades are made it can skew all your TA in a second and human nature is one thing we cannot predict for and why price swings seem so aggressive in the space.

Staying liquid

Now that you understand liquidity you may want to think twice about investing in random coins that don't have liquidity sot he able to get out and take profits at a specific price becomes precarious.

I hope liquidity will become one of your many go-to metrics when investing in speculative efforts and wishing you plenty of profits in the future.

Written by @chekohler

Sources

cointelegraph.com

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