The definition of the term liquidity is: the ability to buy and sell assets in the market without causing drastic changes in market asset prices.

Liquidity can refer to two different areas; liquid markets and liquid assets.

A liquid market means there are always investors in the market willing to trade, and liquid assets are assets that can be easily converted into cash.

But what does this concept mean in the cryptocurrency world?

As with any investment, you want to be able to buy and sell tokens quickly without having to lower the price or wait for a trade to match. In order to achieve this goal, the market in which transactions are conducted must be liquid. In other words, there must be active trading activity in the market, and the buying and selling prices cannot be too far apart.

Let’s give an example from the seller’s perspective:

Bob owns 5 of some kind cryptocurrency, and the price of his coin has increased over the past few days. Bob is happy and decides to quickly sell all his tokens at the current market price.

If the market is liquid, that is to say, there are enough buyers willing to buy Bob's tokens at the price he requires, Bob can quickly sell at the price he meets. Sale of assets. Since there is enough liquidity to accommodate Bob's transaction, his transaction will not affect the price of the token.

However, if Bob asks to sell his 5 tokens at the current market price in an illiquid market, there will not be enough buyers willing to pay the price Bob is asking for. , he would need to lower his asking price or wait for the market to become more liquid in order to sell his tokens. If Bob decides to sell at a lower price, his transaction will also affect the current market price of this token.

How to judge whether the market is liquid

When considering whether the market is liquid, A good approach is to first look at three important indicators: 24-hour trading volume, order depth, and the difference between the ask price minus the bid price, also known as the bid-ask spread.

However, due to factors such as limit stop orders and iceberg orders, the order book does not represent the most accurate price. These special orders are created through trading automation tools and therefore do not necessarily appear on the order book until certain conditions are met.

Liquidity is extremely important when considering trading. This is a key factor in being able to easily enter or exit a market.

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