Simply put, liquidity in cryptocurrency markets refers to the ease at which a given asset in the cryptocurrency market can be exchanged for cash. More importantly, the exchange shouldn’t affect the price of the asset. This key factor is vital to any trader in the cryptocurrency world.
That’s because a trader needs to have the transactions completed as quickly as possible. The more liquid a given market is, the most stable it is. With that in mind, liquidity affects the stability of a particular coin and the market. Other factors that will be affected by liquidity in cryptocurrency markets include:
What factors are affected by Liquidity in Cryptocurrency markets
- Manipulation resistance: well, we don’t call crypto-world the Wild-Wild West for anything. There are a bunch of pseudo-players from different walks of life with a little regulatory framework. In addition to that, cryptocurrency has a long history of price manipulation. In fact, the lack of accountability is only one side of the story. Equally important is the liquidity of the market that will make it easy for manipulation. More liquid assets are resistant to this kind of manipulation.
- Transaction time: when the liquidity is higher, the orders get filled much faster. This factor is advantageous to frequent traders.
- Technical analysis: the liquidity of a particular asset arguably has a lot to do with most technical analysis. Cryptocurrency liquidity brings tighter spreads and better stability; hence the market develops, and it’s precise.
So, why is crypto trade volume a lousy metric in the cryptocurrency market
If anything, liquidity in cryptocurrency markets has shown as that if you rely on the crypto trade volume to focus your trading strategy, then you are likely to fail. As much as crypto trade volume makes the coin trustworthy to any novice trader, it might be manipulated to suit a significant player in the market. That said, you might be lured into a trap, and your assets will pay the price.
More importantly, through research, it was discovered that to attract new users, scam crypto exchanges are often inflating their trade volumes. That will help them rank higher on established ranking sites. As a result, the platforms are seen as being authoritative while at the same time receive more media attention.
Additionally, top-list exchanges might use this strategy to attract high listing fees from projects who want to list their assets. That’s because higher crypto trade volume (might suggest higher liquidity which is absolutely wrong) will translate to more trading. So, the more people trade on a particular coin, the higher the crypto liquidity will be released.
How to deal with crypto trade volume-based decisions
Thankfully, the crypto world is maturing by the day and rules (I know we hate all hate rules, especially in crypto, but this one will work in your favour) are now in place to ensure proper records. With time, small and irrelevant altcoin will perish. Additionally, scam exchanges will be deemed irrelevant. That’s because investors are now focussed on transparency on the crypto platforms.
As we’ve seen over the years, sites such as Liquidary can now develop better crypto trade volume metrics, and also several more honest and transparent exchanges are on the rise. While we are still on the early crypto-adoption stages, it’s more than clear that cryptocurrency liquidity is a huge factor that still needs a more work. All in all, when done correctly, we can all always acknowledge the importance of liquidity in cryptocurrency markets.
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Disclaimer: None of the above shall be considered investment/financial advice or advice on trading techniques, models, algorithms, or any other schemes. Do your own research.