Liquidity is a very important topic that every crypto trader must be conversant with, but unfortunately, more than 60 percent of traders can't explain what liquidity is and how it affects price.
Follow me at #Ernestacademy as we discuss everything you need to know about the aforesaid topic.
What is liquidity in cryptocurrency?
Liquidity refers to the degree of ease with which a cryptocurrency asset can be bought or sold in the market without significantly impacting its price. i.e., the measure of how quickly an asset can be converted into cash or another cryptocurrency at minimal transaction costs.
Liquidity is what makes every crypto asset readily tradable; without it, you won't be able to sell or buy.
Importance of liquidity in the market:
1. Price Stability: In liquid markets, large buy or sell orders are less likely to cause significant price fluctuations. The presence of many buyers and sellers helps absorb the impact of large trades, maintaining price stability.
2. Reduces slippage: slippage refers to the difference between the expected price of a trade and the actual executed price. If you have traded on DEX before, you will understand how this applies. High liquidity will ensure that the slippage is very tinyâin some cases, 0.1 percent.
3. Fast execution: a highly liquid market is very fast to trade in as traders will be able to buy and sell without delay.
4. Lower transaction cost: The difference between the bid and ask prices will be very narrow.
5. Market depth: A highly liquid market encourages market depth, which is the volume of buys and sells at different prices.
Simple illustration of the importance of liquidity.
#BTC is the most liquid asset in the crypto industry. If a sell of $10 million is initiated by a trader, it will be executed in seconds without any significant impact on the price, but if such an amount is initiated in the #KEY token, you will observe a very sharp drop in the price. That's because of liquidity.
In conclusion, liquidity is vital in trading, and every trader must ensure they are entering liquid pairs to avoid losing funds.
