Liquidity as the Key Aspect of the Market Quality

At the beginning of 2021, market participants earned whopping double-digit percentage yields for providing liquidity to Decentralized Exchanges (DEX). This statistic speaks in favor of the excruciating need for a solution to the liquidity problem the cryptocurrency market has. With an exception of the most popular markets, large trades cause volatile moves in the assets’ prices. These movements often lead to the domino effect and further price increase/decrease. Liquidity plays a key role in any stable market. The ability to open and close trades whether the party is a big investment fund, an institution, or a small-scale trader is crucial for reaching the next stages of industry’s growth. In this article, we will explore liquidity in the cryptocurrency market, explain how it works and what impacts it can have on market participants in different circumstances. What Is Liquidity in Crypto? Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. Market liquidity refers to: Time of transaction: how quickly you can fill orders at the prevailing price. Depth: whether or not you can buy or sell large orders without changing the price significantly.  Spread or Tightness: the market has high tightness if you can buy and sell at a very similar price (bid-ask spread).  Resiliency: the market is resilient if any imbalances may be corrected in a short time. Price slippage: is there a difference between the expected price of a trade and the price at which the trade is executed? Slippage can happen during periods of higher volatility. Also, it can occur in an illiquid market —  when a large order is executed but the existing volume at the chosen price is not enough to maintain the current bid/ask spread. Jump to an example to see how the price slippage works in practice. Common Misconceptions About Liquidity in Cryptocurrency Markets Some people mistakenly call traded volume liquidity. While two are connected (better liquidity leads to better trading conditions and higher volumes), they are not the same. Big volumes don’t necessarily mean good liquidity. If the…

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