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Education | Guides

What Does Liquidity Actually Mean?

Author

Rickie Sanchez

Tags

Tags Editor's Choice / Slider Posts

Reading time

2 mins
Last update

Author

Rickie Sanchez

Tags

Editor's Choice / Slider Posts

Reading time

2 mins
Last update

Author

Rickie Sanchez

Tags

Editor's Choice, Slider Posts

Reading time

2 mins
Last update


Liquidity

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Key Takeaways

  • Liquidity refers to how easily you can buy or sell a cryptocurrency without affecting its price.
  • Just like with any asset, high liquidity in crypto means there are many buyers and sellers, leading to smoother transactions.
  • Conversely, low liquidity can result in significant price swings when buying or selling large amounts.

Liquidity is a general financial term that describes how easy it is to buy or sell an asset at a fair price.

US dollars are the most liquid assets in the world because they can easily be turned into any currency practically anywhere.

Bitcoin is less liquid because, well, if you are out there in the wilderness, you are likely not going to find buyers for your satoshis.

What About Luxury Goods?

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You could argue that a recognizable luxury brand is more liquid in certain situations than Bitcoin is. In fact, more people would be willing to pay you for it.

Understanding Liquidity

The same asset has different liquidity profiles depending on the context. Cryptocurrencies suffer from low liquidity in smaller countries. Sure, several of them use crypto, but how many of them actively trade it for their native currencies on a daily basis? It’s probably a tiny fraction.

This is one reason why local crypto prices are not as good as those on international exchanges; the liquidity is just lower.

Liquidity Of Memecoins

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You can also apply the same thinking to young memecoins. We often see news of memecoins mooning in price, but if the liquidity is low, you will find that the accurate price you get when you sell can be 30% – 50% lower than expected.

Final Thoughts

This phenomenon is what we call “slippage,” and it is one of the most annoying consequences of low liquidity. In other words, the actual value of your assets can only be determined by the availability of willing buyers.