What is Liquidity? Why is it Important?

What is liquidity? In cryptocurrencies, liquidity refers to the ease with which an investor can convert their holdings into cash or another altcoin. In this article, you can find answers to questions that investors often seek, such as what is liquidity, why is it important, what is it for. As Kriptokoin.com, we have prepared it for our curious readers.

What is liquidity?

Liquidity is essentially a term that comes from traditional finance. It refers to the ability to trade without dramatic changes in the value of a cryptocurrency. Accordingly, a liquid asset can be converted into cash without major volatility. However, the high liquidity of a market means something different from the one mentioned above. The high liquidity of the market indicates that there are a lot of investors willing to trade. Another usage area of ​​liquidity is ‘to be liquid’. It is a common term in the cryptocurrency space. Accordingly, being liquid is a term that refers to an investor entering a leveraged position, making a loss and removing their assets. In other words, liquidity is a term that can have various meanings in different situations.

How is liquidity determined?

In addition, the less volatility of the pairs benefits investors. However, some cryptocurrencies are more liquid than others. More popular cryptocurrencies like BTC/USDT and ETH/USDT have better liquidity than lesser known ones. In addition, liquidity differs according to the stock markets. There are liquidity differences between major cryptocurrency exchanges and lesser-known exchanges. Liquidity is high in trading areas where popularity and trust are high. The world’s most liquid assets are stocks, gold and cash. These assets are more liquid due to their traditional nature.

Why is liquidity important?

The ideal of every market in the world is high liquidity. In high liquidity markets, investors can trade assets more easily. Liquid assets provide easier access to cash. However, illiquid assets are traded at a sharp discount if they need to be sold quickly. So before investing in Bitcoin or altcoins, it is important to know how liquid that asset is. Investments in illiquid assets can enable users to generate high profits. However, it is difficult to convert these earnings into cash in a short time.

However, the liquidity of exchanges has taken its place as a very new concept. Even on highly liquid exchanges like Binance, there are altcoins that are less liquid. A good way to evaluate the liquidity of a pair is to compare the 24-hour volume of that pair with how much you want to buy. The amount you want to buy can be more than one percent. This indicates that the mentioned parity is illiquid. Additionally, the lower the liquidity in a pair, the less likely the value of the assets to be correct. This phenomenon is common in DEXs, where crypto assets can be easily created.

What is liquidity: Bear market and liquidity

In periods when the markets move downwards, liquidity life is important. In some periods, markets enter bearish cycles called bear markets. Thus, people want to switch from illiquid assets to more liquid assets to protect their earnings. This causes liquidity to shrink. This situation, which is especially negative, causes excessive price fluctuations in parities in the markets. The more liquid the market is when the decline starts, it is possible to pass this difficult situation with less loss.