Liquidity as a term is defined as the ability to buy or sell assets in the market without causing a drastic change in the price of the assets.

Liquidity can refer to two different areas; Liquid market and liquid asset.

Liquid market means that there are always investors in the market willing to trade. A liquid asset refers to an asset that can be easily converted into cash.

But what does this mean when talking about cryptocurrencies?

As with any investment, you want to be able to sell and buy tokens quickly without needing to reduce the price or wait too long for your trade to match. For this to be possible, the market you are trading in must be liquid. In other words, there should be high trading activity and the bid and ask prices should not be too far apart.

Let's take an example from a salesperson's point of view;

Bob has 5 tokens of a certain cryptocurrency and the price of his tokens has increased in the last few days. Bob is happy and decides to quickly sell all his tokens at the current market price.

If the market is liquid, meaning there are enough buyers who are willing to buy Bob's tokens for the price he is asking, Bob can sell his assets quickly and sell at the price he wants. Bob's trade does not affect the price of the token as there is enough liquidity to accommodate Bob's trade.

However, if Bob is asking to sell his 5 tokens at the current market price and the market is illiquid or low on liquidity, meaning there are not enough buyers willing to pay the price Bob is asking, he is required to reduce your sale price or wait for the market to become more liquid so you can sell your tokens. If Bob decides to sell at a lower price, his trade is also affecting the current market price of the token.

How to know if a market is liquid.

When looking to see if a market is liquid or illiquid, it is good practice to look at three important indicators. The 24-hour trading volume, the depth of the order book, and the amount by which the ask price exceeds the ask price, also known as the bid/ask spread.

However, the order book may not always be an accurate representation due to factors such as stop-limit orders and iceberg orders, which are created using trading automation and, as a result, do not always appear in a book. of orders until the specific conditions for those orders are met.

Liquidity is extremely important when considering your trades. It is a key factor to easily enter or exit the market.

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