Liquidity is a property that is inherent in all assets. It means the ability to sell an asset at market value. For cryptocurrency, the concept of liquidity is also used. It can be used to determine the investment attractiveness of digital assets.
Basic concepts of cryptocurrency liquidity
According to CoinMarketCup, there are more than 17 thousand coins and tokens. Not all of them are in demand, and some projects are generally inactive or represent scam developments.
Participants in the cryptocurrency market seek to identify promising assets for trading or investment. At the same time, an important criterion is the liquidity of the cryptocurrency. The higher this indicator, the greater the stability of the asset and the less volatility. The owner of a liquid asset will always be able to sell his cryptocurrency, there will be a buyer for it.
There are several categories of cryptocurrency liquidity:
- Sellability of assets.
The first category is related to work on the cryptocurrency exchange. Liquidity in this case is characterized by the presence of trading pairs, orders for transactions.
Market liquidity is indicative of the state of the digital asset market. Marketability is related to the presence of sellers and buyers.
These liquidity criteria are considered when forming trading strategies. The right choice of cryptocurrency, considering all factors, will allow you to quickly sell an asset without financial losses.
Factors that affect liquidity
The liquidity of a cryptocurrency depends on the following factors:
- Daily trade turnover.
- The price of an asset.
Trading volume is an important factor that investors and traders are guided by when choosing a tool for making money. The price of an asset also affects liquidity.
The trader’s income depends on fluctuations in the cryptocurrency exchange rate. Therefore, it is important to quickly sell the asset if necessary. In this case, the liquidity of the cryptocurrency plays an important role. The order book on the exchange should have enough offers to quickly execute the trader’s order. Otherwise, the site will become uninteresting for users, and they will go to competitors.
Unlike traditional banks, in the field of digital assets, platform users act as liquidity providers. They are combined into liquidity pools. This happens on decentralized DEXs using smart contracts.
Liquidity pool participants transfer part of their own funds, which are blocked in a smart contract. They become available to other traders who receive a loan or use this cryptocurrency to trade. Investors in the liquidity pool receive interest for their services.
The traditional banking system works in a similar way. For the safety of funds, a bank client invests money in deposits and other savings programs. These funds are used by banks to issue loans and solve other financial issues.
In the cryptosegment, there is such a thing as a liquidity trap. This is a situation in which users try to keep their assets, do not invest, and do not spend. A liquidity trap is a sign of a failing economy or a crisis in the digital asset market. Users are waiting for better times, trying to save their money.
The decrease in the number of cryptocurrencies in circulation is associated with various factors, for example:
- Locking assets in DeFi applications.
- Burning coins or tokens to reduce inflation, a prime example is the BNB exchange token, which exchange owners burn on a quarterly basis.
- Loss of access to the cryptocurrency wallet, according to various experts, 20% of all bitcoins are permanently blocked.
The following indicators can be used to calculate the liquidity ratio:
- A number of trading pairs.
- Trading volume.
- The number of coins or tokens that have been listed on the site.
In this case, the parameters in the complex are considered. Not always a platform with a large number of currency pairs can provide high liquidity. To calculate the real indicator, you need to consider different variables. In this case, special services are used.
It should be borne in mind that liquid sites have a small difference between the minimum and maximum prices. Also important is the size of orders in the order book. Exchanges with little liquidity have large spreads and small bids in the upper range.
Among the most liquid cryptocurrencies are Ethereum, Solana, Cardano, Binance Coin, and others.
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