Explanation of mobility

 The term liquidity is defined as the ability to buy and sell assets in the market without causing sharp changes in the market price of the asset.

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

Liquid markets imply that there are always investors in the market willing to trade, while liquid assets are assets that can be easily converted to cash.

But what does this concept mean in the cryptocurrency space?

As with any investment, you want to be able to buy and sell tokens quickly without having to lower the price or wait long for a trade to match. In order for this to happen, the market in which the trading takes place must be liquid. In other words, there must be active trading activity in the market and the bid and ask prices must not be too far apart.

Let’s take an example from a seller’s perspective:

Bob owns 5 of a certain cryptocurrency and the price of his tokens has increased in the last few days. Bob is happy and decides to sell all his tokens quickly at the current market price.

If the market is liquid, i.e. there are enough buyers willing to buy Bob’s tokens at the price he is asking for, Bob will be able to sell his assets quickly at a price he is satisfied with. Since there is enough liquidity (in the market) to accommodate this transaction by Bob, his transaction will not affect the price of the tokens.

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, and he will 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 determine if a market is liquid

When considering whether the market is liquid, it’s good practice to start by looking at three important metrics: 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, the order book does not represent the most accurate price due to factors such as limit stop orders and iceberg orders. These special orders are created through trading automation tools and therefore do not necessarily appear in the order book until specific conditions are met.

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

Make sure you invest and trade cryptocurrencies only on trusted platforms like Bingat. With various powerful features and a wide ecosystem, cryptocurrency trading has become easier.