What does liquidity mean

One of the questions you may ask yourself when you are investing in an asset is that can I easily sell this asset whenever I want? In other words, you are thinking about the “liquidity” of that asset. Liquidity, in simple terms, refers to the demand that exists for a specific asset, and the ease with which you can sell it at any time. It is an important criterion you have to consider before choosing an asset to invest in. In this article, we will explain the concept of liquidity in more detail, and go through its implications in the cryptocurrency market. Stay with us.

What is liquidity and what is a liquid asset?

A liquid asset is a type of asset that can be easily changed into fiat currency, has a high level of scalability, and can be sold at the market price. There are some assets that are intrinsically liquid. Gold, famous currencies like Dollar and Euro, stocks, bonds, and Exchange-Traded Funds or ETFs are usually considered liquid assets. On the other hand, a house is a less liquid asset since selling it is a more complex process and may take a longer time.

What is an illiquid asset?

Imagine a highly valuable asset like a rare painting from a famous painter. This asset may be worth hundreds of millions of dollars, and there is no doubt in its value. However, it isn’t a liquid asset. Why? Because if you decide to sell it today, you may not be able to sell it as fast as you can sell a piece of gold. You have to wait for several days or months, and you have to find a buyer who is willing to buy it at its real price. So, this painting is an illiquid asset. Pay attention that by illiquidity, we don’t mean that you can’t sell this asset at all, but we mean that you have to wait more to change it into fiat currency.

What is liquidity in the cryptocurrency market?

The concept of liquidity also exists in the cryptocurrency market. Some cryptocurrencies are clearly more liquid than the other ones. The liquidity of cryptocurrencies generally depends on the markets in which they are being traded. You know that cryptocurrencies are bought and sold in the cryptocurrency exchanges. The more famous a coin or token is, the more exchanges support it. Imagine a cryptocurrency like Bitcoin. It is literally impossible that a cryptocurrency exchange in the world doesn’t support Bitcoin. So, Bitcoin is a liquid cryptocurrency. On the other hand, there a number of new coins and tokens entering this market every day. These tokens may be traded on decentralized exchanges, but not all of them are listed on famous exchanges. So, they are categorized as illiquid cryptocurrencies.

Conclusion

Liquidity is an important metric that determines the health and prosperity of a market. It is one of those features you can take into account while deciding to invest in an asset. The combination of these important metrics gives you an appropriate insight and help you make better investment decisions.