This article examines the role liquidity plays in a cryptocurrency exchange, why it’s important and highlights some of the key factors that affect liquidity in order to give a basic understanding of how it works.
What is Liquidity?
Liquidity is a common term used in the financial markets and can best be described as how easily an asset can be swapped for cash. When seen in the context of cryptocurrency liquidity it’s how easily coins can be exchanged into cash or other coins. Hence, the market can present either high or low liquidity levels. High liquidity occurs in situations where there is a stable market and few price fluctuations. Conversely, with low liquidity levels there is market volatility present which can cause spikes in the price of cryptocurrencies.