Cryptocurrency is still trying to find its feet in various industries and use cases. For the moment the majority of investing for profit and loss taking are done via exchanges as people trade it as a speculative asset.
A large part of cryptocurrency value at the moment comes from buying and selling it for various altcoins or fiat pairs and trying to ride peaks and troughs in the market with the intention of making a profit.
Price obsessed
If you're only into cryptocurrency for the money, then swing trading and day trading should be where you would focus your energies. You would hang out on exchanges and follow information regarding market and price changes.
You will see countless content, websites, YouTube channels and more solely dedicated to the price and price moves of cryptocurrencies and what that means for investors.
One of the critical factors in buying into a cryptocurrency as well as price changes is the amount of liquidity available. I'm sure you've heard this term before, so what exactly is market liquidity as it pertains to cryptocurrency, and how does it affect the price of coins?
Let's take a look, shall we!
Image source: - newsbtc.com
What is liquidity?
Liquidity refers to how much of an asset is available on the market for sale and the ease at which an asset can be exchanged (purchased or sold)for cash without affecting the price of that asset.
The more liquidity in the market the less chance of slippage, which means the price changes due to a large order going through.
- For example, making a large order of STEEM buying could push up the price and you would get less steem for your buy-in
- While on the opposite side, selling a large order could push the price down and get you less for your sale
Investors want to avoid slippage as much as possible and look at order books on exchanges to see how much liquidity is available at a specific price point before buying in or selling.
Why is liquidity significant?
In terms of cryptocurrency, liquidity is scarce and is a Marco problem for the entire space, if it weren't we would not see the massive price swings synonymous with space.
Stability and manipulation
You all know the term pump and dump? It's become famous during the ICO era and any shitcoins had high valuations due to their lack of liquidity.
An illiquid market can allow a single large actor or group of actors to manipulate the price for their benefit and then sell off to the next round of investors effectively playing hot potato with the coin to see who gets stuck with the loss.
The more liquid a market is, the more stable it is with plenty of traders on the other side willing to fill the buy or sell order with minimal impact on the asset's price.
Transaction time
When you have more buy and sell orders available you are able to fill orders quickly instead of having to wait for other traders to sell or change their orders to match yours to fill your order. This makes transaction times a lot faster and traders can execute orders strategically to take advantage of inevitable price swings.
The more liquidity the larget the orders can be and the bigger the payoff, making trading with high liquidity much more attractive.
Technical analysis
One of the reasons I believe TA (Technical analysis) in cryptocurrency is a load of rubbish is due to the lack of liquidity. When a market has more liquidity it offers tighter spreads and greater stability liquidity brings. This helps the price remain stable and charting formation are more reliable and developed and to an extent more precise.
In low liquidity environments, where large trades are made it can skew all your TA in a second and human nature is one thing we cannot predict for and why price swings seem so aggressive in the space.
Staying liquid
Now that you understand liquidity you may want to think twice about investing in random coins that don't have liquidity sot he able to get out and take profits at a specific price becomes precarious.
I hope liquidity will become one of your many go-to metrics when investing in speculative efforts and wishing you plenty of profits in the future.
Written by @chekohler
Sources
Previous ADSactly Crypto posts
- ADSactly Crypto: Why SegWit Is a Big Deal For Bitcoin
- ADSactly Crypto: What Is The Bitcoin Liquid Network?
- ADSactly Crypto: What Is Ethereum Sharding All About?
- ADSactly Crypto: Why Is the Bitcoin Hashing Rate Important?
- ADSactly Crypto: What Is Blockchain Interoperability?
- ADSactly Crypto: What Are Bitcoin Forks?
- ADSactly Crypto: What Are Bitcoin Transfer Accelerators?
- ADSactly Crypto: Fungibility And Confidential Transactions
- ADSactly Crypto: A Break Down Of Bitcoin Value
- ADSactly Crypto: How Many Bitcoin's Have Already Been Lost Forever?
- ADSactly Crypto: What Is the Bitcoin Halving?
- ADSactly Crypto: What Is A Bitcoin Paper Wallet
- ADSactly Crypto: The Importance of Private Keys
- ADSactly Crypto: How Bitcoin Futures Could Affect The Future Of Bitcoin
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It's really hard for me to understand about crypto currency. I understand the words but the meaning seems out of my reach. Anyways at least a little it gives me a little understanding about liquidity.
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You don't need to understand everything off the bat, just the things that you would like to do, if you like trading or want to make sure you get the most out of it, then the concept of liquidity sure does help. Take it one step at a time, took me months to get my head around all the concepts
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I think, we will have better liquidity, if the 4 weeks power down is accepted and implemented.
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It most likely will result in more liquidity on exchanges but its only time that will add more liquidity as people continue to sell what they earn here.
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Grateful for your post, @chekohler. In my very elementary knowledge of economics, I have had the idea that the existence of liquidity in a traditional currency means a certain bonanza of it. But also that liquidity could be manipulated in order to intervene from time to time to certain interests in the economy (this has happened in my country -Venezuela- in a recurrent way in recent years, when money is released to create an illusion of bonanza).
From what I understand, in the case of crypto-currency, such manipulation would not be possible since the market is not centralized or managed by the interests of certain national economies, corporations, etc. I do not know if this will be the case? Greetings.
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Well if there is more liquidity then demand and production doesnt increase it will give rise to inflation! In the case of a fiat currency its up to the central bank to be the regulator of inflation where as with crypto its based on demand and suppy
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In these days, the government of Venezuela tried to valorize its crypto-currencies by taking out large amounts to the market, but they were not supported financially, which led many businesses that received such crypto-currencies, to make losses. Now, some Venezuelans, ignorant about crypto currencies, do not trust this form of payment, not realizing that the currency is not the problem, but the lack of liquidity that the government has. As always, clear and educational your post. Thanks
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Yeah distribution of a new currency especially one that is not forced on the people by government mandate will have issues with adoption because its up to individuals confidence in the medium! As we see with Bitcoin its taken 10 years to gain some sorr of confidence anoung a small subset of the world and over time as their becomes more avaiable it comes into the hands of more people and liquidity improves at a healthy market rate
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@tipu curate
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Upvoted 👌 (Mana: 15/25 - need recharge?)
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Hi, @adsactly!
You just got a 0.33% upvote from SteemPlus!
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Curate
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