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Crypto Terms:  Letter L

What is Liquidity?

Liquidity - the absence of price impact on the market when buying and selling cryptocurrencies.
2 minutes

Let's find out Liquidity meaning, definition in crypto, what is Liquidity, and all other detailed facts.

Liquidity is a term used to describe how you can buy and sell cryptocurrencies without having any impact on the overall market price. Essentially, it is the process that outlines how easily and quickly you can convert a certain cryptocurrency into cash while making sure that the asset’s value remains the same.

This is the type of market that traders prefer. If a market is not liquid, then the process of entering or exiting said market becomes much more difficult.

Currently, the foreign exchange market, also known as the forex or FX market, is the most liquid market. The Bank for International Settlements has recorded that, as of April 2019, the foreign exchange market has made $6.6 trillion in daily transactions.

When it comes to liquidity and the crypto sector, one of the most liquid digital assets is considered to be Bitcoin. Its trading volumes have been growing since 2014 and have reached tens of billions of trades every day. It’s predicted that cryptocurrencies will become even more liquid if they become widely accepted all over the globe.

Moreover, liquidity is convenient when evaluating the speed and price slippage of exchanges that enable trades between fiat and crypto. Usually, liquidity levels are influenced by the number of users on the exchange platform.

Liquidity makes charging a discounted or a premium price impossible in a perfectly competitive market, since active cryptocurrency trading allows to avoid price distortions.

Besides, a liquid cryptocurrency generally continues trading around its market price. 

Another example of a highly liquid market is the real estate market. It's considered to be highly liquid due to its lengthy process of buying and selling land or buildings. These processes are generally full of paperwork and have a variety of eligibility requirements, among other things.