What Is Liquidity In Cryptocurrency?
What Is Liquidity In Cryptocurrency: The reduced hurdles with which the assets in an investment can thrive, can be sold, or bought, without necessarily having a negative effect on its price, remains the backbone of that business. Liquidity creates a type of balance in a business and enhances transaction stability. However, Liquidity, with respect to certain business spaces, can vary a little.
In cryptocurrency, liquidity borders on the level of the effortlessness of the conversion of digital assets to find relevance and value when converted to other digital assets, or to orthodox fiat money — to cash, through a sane transaction mechanism.
Liquidity in crypto is the parameter used to measure the level of the true value of any crypto. If there’s a crypto, what’s the percentage of its demand? Does it have a sane and sufficient level of outside value? What’s the ratio of buyers to sellers of the said crypto? Can it stand the test of time? The answer to these and other questions is what you need to know.
What Is Liquidity In Cryptocurrency
It’s factual that the level of liquidity in a crypto sphere is directly proportional to the height of volatility hovering around the cryptocurrencies existing within that space. More precisely, liquidity level determines to a great extent, how volatile a crypto market can be.
If there’s a seller, there should be a willing buyer to allow for a liquid market and a healthy trading ecosystem for both parties to coexist. The essence of every business is to make profits.
If you cannot buy a digital asset in your desired amount, and leverage trading benefits, or decently sell even when the price of the said asset falls, then such a market lacks a healthy dose of liquidity. Especially if the market gets you contemplating totally zooming out of it.
However, this possibility has been eradicated by the invention of liquidity pools.
What is a Liquidity Pool; How Does It Work?
A simple observation beyond technical terminologies reveals that the very essence of liquidity stems from a place of intuition. Crypto is the backbone of all DeFi economic activities — it’s always needed to spur transactions. Now, this is where the concept of liquidity pool comes in.
For every digital asset bought, there’s a level of decrease in the supply of that said digital asset on the decentralized exchange. Now, the decreased supply creates a kind of scarcity and results in increased demand, hence a price increase. This is just a basic economic rule of demand and supply.
Liquidity pools encapsulate locked-up crypto tokens supplied by the users on a platform, guarded by smart contracts, and functions on mathematical codes and automated market makers (MMAs), all of which help the crypto tokens to become self-executing to create a balance and a stable crypto market space.
For clarity, here’s an example: if a person sells asset A to buy asset B, such a person depends on the token in the asset A/B liquidity pool that has been made available by other users, so that there’s no shortage of asset B to result in volatility.
Now that you’ve known what liquidity pool is and how it works, what then does high liquidity mean?
What is High Liquidity; What Happens If Liquidity Is Low?
In crypto assets, high liquidity is characterized by a good number of investors and high trade volumes — these are seen as these crypto are easily bought or sold.
Examples of some of the crypto with high-level liquidity are Bitcoin, Ethereum, Ada, etc. While a cryptocurrency like TLM of Alien Words doesn’t measure up to the same liquidity level.
On the other hand, when liquidity is low, the market lacks fluidity and there’s difficulty in buying and selling crypto. In most cases, the price is ridiculously beaten down and the seller usually settles for a loss. The low liquidity market is messed up with the difficulty to trade.
Despite the low buying and selling power that comes with a low liquidity crypto market, there are still crypto platforms that are ever ready to buy and sell currencies as long as those cryptos have been listed on the said platform.
Some of them are Dart Africa, Binance, Luno, Yellow Card, Breet, etc. These crypto hubs have over the years, been able to offer quality services and have found relevance among a pool of crypto traders.
While most some of these crypto facilities like Binance and Luno are a bit more advanced than the rest of them, some reviews have shown that other crypto platforms like Dart Africa, which is region-based (only for Nigerians and Ghanaians) are structured to meet the peculiar demands of traders from these market areas, and as such, suffice better.
Dart Africa especially, is famous for its, tight security system, simplistic features, and ease of use. Little wonder there has been an increased sign up rate among Nigerians and Ghanaians in the last few years. Especially those who seek to sell.
Many cryptocurrencies started off as failed projects because of a lack of liquidity. This is the reason it’s seen as the backbone of all assets, without which many cryptocurrencies would have been in a fine dinosaur existence.
Liquidity creates market stability, reduces volatility, increases buying and selling power, and strengthens the ground for buyers and sellers to healthy coexist in the same market space. To mention also, we have seen how crypto juggernauts tweak liquidity to their dirty gains, this, however, is a topic for another day.
What Is Liquidity In Cryptocurrency – What Is Liquidity In Cryptocurrency