June 14, 2021
What Is Liquidity?
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What Is Liquidity?

There is a term in trading and investing world called ‘Liquidity’, which is essential for every trader and investor to be familiar with. Generally, liquidity refers to how easily an asset could turn into cash without affecting its price. In other words, liquidity means the ease of buying and selling an asset in the market.

In fact, cash is the most liquid asset in the world. The reason is that you can easily exchange it with any other assets, commodities and securities easily. On the other hand, property or artworks have the less liquidity. The reason is that when the seller wants to sell its own property, it would take time and also the seller should decrease the price in order to find a potential buyer. In crypto world, to choose the right cryptocurrency to invest in, market liquidity is one of the important criteria too.

 

Advantages

High liquidity assets have two main advantages. The first is that, whenever their price is low, they can be easily sold and invest the money in some other type of assets. The second is that high liquidity assets are less risky to invest in. The reason is that always there is a buyer or seller in the market and it can be exchanged to cash or other assets quickly and easily.

Market liquidity

Moreover, the term liquidity uses for market as well. A high liquidity market is a market, which the trading and exchange are executing in large quantities. Consequently, it would be easy to buy and sell an asset in that market.

When one wants to invest in a cryptocurrency, should consider the liquidity of the market. It means, that they should be able to sell or buy the desired coin or token easily without affecting its price or even waiting for long time.

Exchange liquidity criteria

There are three criteria related to an exchange liquidity that one should consider.

The first is the volume of transactions in a day. In cryptocurrency world, it refers to the total amount of the coins or tokens, which sold or bought on the platform.

The second is the amount of sales orders in the order list, which called the depth of the order list. It’s notable that this criterion is not much reliable. The reason is that the orders, which used stop limit, will not show in the order list.

The third criterion is the gap between the buying and selling price. In fact, it refers to the difference between the highest buying price and the lowest selling price. The smaller the gap, the more liquid the market is.

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