Definition:
Liquidity describes the ease at which cryptocurrency can be bought or sold on exchanges at its market price. In other words, this term tells us how quickly a digital currency can be traded. A coin or token that is liquid can be converted to another form of currency easily. On the other hand, a coin or token that has little liquidity is difficult to buy or sell.
Explanation:
Liquidity is affected by the demand for a particular cryptocurrency. For example, billions of dollars of Bitcoin are traded every day. Therefore, Bitcoin is considered to be highly liquid since it can be bought, sold, or traded on almost exchange immediately. Little-known altcoins, on the other hand, have significantly less demand, and therefore, may be difficult to trade on exchanges.
In addition to demand, the liquidity of a specific coin or token can be dependent on the exchange it is listed on. For example, while there is a heavy demand for Bitcoin, it may be difficult to trade it on a low-volume exchange.
High-liquidity cryptocurrencies offer certain advantages, such as:
- Better resistance to price manipulation.
- Better overall market stability.
- Faster transaction times.
- Increased accuracy for technical and fundamental analyses.
