What is Liquidity? Definition and types of Liquidity

What is Liquidity? Why are crypto players so concerned about the Liquidity of exchanges and Tokens? In this article, BHO Network will show more information about the e-commerce market!

1. What is Liquidity?

Liquidity refers to the efficiency or ease through the purchase and sale of assets of cryptocurrencies. In addition to Crypto, several other stock exchanges have applied a liquidity process with a dynamic planning mechanism. If the deal has high Liquidity, the assets will be sold faster and not be affected in value.

2. Should I invest in a high liquidity coin?

If you invest a large amount of money, choose a high-liquidity project to limit the price difference. The reason is that the higher the deviation, the greater the risk of liquidating the asset. As for the project with low Liquidity, players can solve it in two ways:

• Divide large value orders into many small orders to see the increase and decrease in the coin price.
• Prioritise choosing a DEX with high Liquidity, such as SushiSwap, Uniswap, etc.

Read more: What is Bitcoin Halving? Everything about the BTC

3. The importance of Liquidity

One of the indispensable factors in the virtual currency market is Liquidity. So what role does Liquidity play? The content below will help you learn more.

3.1 Price Affordable

In a liquid market, prices represent fairness to the participants. The high trading activity ensures that sellers will sell at a competitive price (so as not to lose money) while buyers will pay a higher price (according to their frustration). This creates an equilibrium market price for all. Balanced and stable prices are two key factors that demonstrate market stability and ensure market participants are not disadvantaged.

3.2 Stable market

High Liquidity ensures stable prices and is unlikely to be subject to significant fluctuations in the market by large transactions. For example, "Whales" easily influence prices in an illiquid market with little activity. An order to buy or sell an object will create significant volatility, contributing to increased volatility and risk. In a liquid market, the price is stable to withstand large orders due to the presence of many participants. And trading orders.

3.3 Increase Accuracy of Technical

Analysis Technical analysis refers to the study of past prices and the use of indicators, technical reports, and chart patterns that predict the price of a coin. Although many disagree, the method is still widely used to understand the market and general trading.

Prices and chart formations in liquid markets are developed and increasingly accurate. A typical example is Forex - a forex trading platform with stable Liquidity of $ 5 thousand per day on average.

3.4 Easy and quickly transaction

In the liquid market, buying and selling of cryptocurrencies are very simple because the orders have been matched to the needs of the participants due to the large volume. You can log in and out of transactions when there is no need. This is also one of the critical factors for the Bitcoin market to thrive.

4. 3 factors affecting Liquidity

Liquidity Mining works based on a combination of many different factors. Specifically, the Liquidity of the virtual currency market is affected by three elements as follows:

4.1 Trading volume

Trading volume refers to the number of Coins in the exchanges and aggregates over 24 hours. This factor reflects the market performance of a particular coin. The higher the volume, the more people buy and sell the Token.

4.2 Cryptocurrency Exchanges

An exchange is a place where assets are freely traded between buyers and sellers. The higher the number of crypto exchanges, the more active the market is, and the more users increase their assets. The increase in performance and trading volume enhances market liquidity.

Currently, there are more than 200 cryptocurrency exchanges, 21 decentralised exchanges, and many peer-to-peer (P2P) platforms in existence. Many other deals are active and promise to have many new platforms launched in the future.

4.3 Acceptance

The success and viability of money depend on acceptance and adoption by the masses or at least a network of individuals who can use the money for a specific purpose. This is also why virtual currency is widely used in shops and businesses and accepts payment methods in transactions.

Bitcoin and cryptocurrencies are gradually becoming popular payment methods, especially in online stores. There are 182 countries with more than 370,000 providers that allow users to pay with cryptocurrencies. Big names use Coin in transactions such as Amazon, IBM, Microsoft, Apple app store, PayPal, and eBay.

4.4 Regulations of Law

Each country has its legislation on cryptocurrency liquidity. Even some countries have laws that prohibit virtual currencies from transactions. This has affected Liquidity, and it will be difficult for users to buy and sell Tokens in that country.

Find a private seller or rely on peer-to-peer platforms if you want to own cryptocurrency. Since the country's Liquidity is low, liquidity will affect the price ratio. Depending on the buyer's needs, the user can adjust the price to meet the market's needs.

Read more: What is STO (Security Token Offering)? A details guide

5. How to check the Liquidity of coins

Coins in the market can check Liquidity using several simple methods. Specifically, you can apply in 1 of the 3 ways below.

5.1 Trading volume within 24 hours

Trading volume represents market liquidity and historical volume data. This is also the premise for predicting future price behaviour. Some platforms you can use to check the volume are CoinGecko, Coinmarketcap, or Coin98 Market.

You need to see which Coin is being traded the most on which exchange and whether that exchange is in the area of ​​fake volume or wash trading. If it is in this category, the player will have difficulty trading due to the obstruction of the bot.

5.2 Order Book Depth

You need to check the Order Book depth on the Coin's exchange. This has the effect of helping to estimate the level of Liquidity if the transaction is instant. Example: A player wants to sell 100,000 coins A at $0.1, and the Buy Order Book Depth of Coin A shows:

• At $0.1, there is only $40,000 in A.
• At $0.09, there are another 60,000 in A.

Based on the above results, you can estimate the difference if you trade off Liquidity with transaction speed.

5.3 Bid-Ask Spread

The Bid-Ask Spread represents the difference between the most recent buy and sell orders shown in the order book. The higher the Bid-Ask Spread, the more the Coin's Liquidity is very low and vice versa.

Example: Bid-Ask price of DOGE/PAX coin on Binance exchange. Users can see the nearest buy order of DOGE is 0.0025293 PAX and the closest sell order is 0.0026798 PAX. If you buy DOGE at 0.0026798 PAX and sell it at 0.0025293 PAX, the player has lost ~6%.

6. What are Liquidity Pool and Liquidity Mining?

Liquidity Pool refers to the liquidity "pools" of AMM exchanges or Lending projects where users deposit assets as Liquidity for other parties to trade. The project developer will offer many incentives such as giving away Tokens and extracting the transaction to encourage users to send assets.

The project developer action is also known as Liquidity Mining. The liquidity incentive program aims to attract more Liquidity into AMM, create significant value without much slippage, or encourage users to participate in borrowing.

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Above is the information related to the issue "What is Liquidity?" BHO Network has compiled for readers' reference. Liquidity plays a vital role in the virtual currency market, so players must carefully research this issue before joining the exchange. Be wise in your options to safely increase your wealth!