Crypto Explained #3: What is Liquidity in crypto
Liquidity in crypto simply refers to the ease with which an individual can convert crypto assets into cash or other assets of value without a loss in value or change in price.
Generally, “liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.”
Different financial markets trade using a variety of fiat currencies, digital currencies, commodities, assets, and instruments of value. These markets comprise buyers and sellers who create consistent inflow and outflow of value.
*High liquidity markets are associated with many buyers and sellers respectively. This means trades and order books are executed almost immediately. An example is the forex market
*Low liquidity markets are characterized by small numbers of buyers and sellers making it difficult to complete trades.
Over the years, cash has continued to be the world’s No 1 liquid asset due to its highly regulated nature, diverse use, government-backed, and global acceptance, but with the rise of the blockchain technology and cryptocurrencies, the crypto markets have gone from low liquidity to high value despite its volatility.