Cryptocurrency Liquidity and Why it’s Important

Liquidity is one of the key factors, when it comes to trading or investing. Cryptocurrency’s liquidity is the point to which a particular crypto can be easily converted into cash or other coins. Higher liquidity coins give some advantages, as higher liquidity means, better and fairer prices because of the large amount of supply and demand.

If the trading activity is high, it ensures that sellers sell at competitive prices, at the same time, buyers bid at higher prices, thereby creating equitable market price for everyone. Equilibrium price shows the stability of the market, however, it almost never appears in practice.

In any case, if you make a decision to get involved in crypto trading, remember about special cryptocurrency tracker tools, making crypto trading much easier.

Coming back to the main topic, let’s discuss the main characteristics of liquidity.

High liquidity means stable market.

Anyone can agree that having high volume of transactions means that big players and traders will have more difficulties to manipulate the market. Therefore, in illiquid markets with little market activity, "whales" can hugely affect prices and with only one buy or sell, make the prices largely fluctuate, and this can increase volatility and risks in the market, resulting in potential BIG losses. You have to stay out of those kinds of coins where potential manipulation can happen at any moment.

For instance, lately with only small buy order one coin grew its value by 270% and then decreased almost 90% back within a few hours. That’s crazy because someone just cashed all the liquidity available at that moment. In liquid markets, it's quite impossible to manipulate in that way.

Higher the liquidity, the faster the transactions.

If the liquidity of the market is high, it’s much easier to buy or sell any cryptocurrency, as there are more participants in the market.

Higher liquidity means more accurate technical analysis.

In the liquid market, price and charting formation is more developed, as well as correct, which increases the technical analysis accuracy.

But how is the liquidity being formed?

In crypto market, the main factor influencing the liquidity is that main part of crypto owners get involved in investing and trading crypto coins for price appreciation, as opposed to using them as a means of exchange.

The crypto market activity of a specific crypto-asset is determined with the volume, which is the amount of coins that has been traded in exchanges in a certain period of time. Higher the volume is, the higher the market activity is and, respectively, the higher the market liquidity is.

The next factor that affects crypto market liquidity is the number of crypto exchanges, as more exchanges means higher market activity. At the time, there are over 200 crypto exchange platforms, 21 decentralized exchanges, peer-to-peer platforms.

Another not less important factor is the adoption of crypto-assets, as if crypto coins are accepted by more vendors and organisations, crypto owners will have more choice on how to use their crypto-assets, which will increase the crypto market activity, resulting to the growth of crypto coins' liquidity.

The next influential point is considered regulations and laws of various countries. Several countries ban the use of crypto-assets, so this can decrease the liquidity of crypto coins in such countries. Thus, more countries accept crypto-assets and have favorable laws and regulations on them, the higher the liquidity of crypto market will be.

However, one thing to consider is that fundamental big changes are going to happen worldwide and remember that the economic crisis will make crypto market grow much faster than ever before.

There is a HIGH chance to get $2 trillion dollars of market cap in 2019! That is 20 times more than the actual market cap!

To conclude, more people start using cryptocurrencies, more vendors and companies start accepting them, more countries adopt crypto-assets, increasing the liquidity of crypto market, as this will result in increasing of market activity and making much easier to get and sell crypto-assets, and have more ways using them. Higher liquidity will also make more people to trade and invest in cryptocurrencies and here once again let’s mention crypto trackers and their importance. To find out which crypto tracker to choose, check this best cryptocurrency portfolio tracker guide.

Leave a reply