In this article, I will go with you to find out about a problem that is always respected by traders, investors and exchanges in the current cryptocurrency market. That is Liquidity.
Let's get started!
What is liquidity?
Liquidity or liquidity refers to buying and selling large amounts of cryptocurrencies without (or very little) affecting the price of the cryptocurrency.
Nature of Liquidity
In fact, the nature of liquidity is the tradeoff between the speed of buying and selling and the price that can be traded.
For coins with good liquidity, this tradeoff will be very low. This means that, when you buy or sell quickly in large quantities will not affect the price of the coin much affected.
And conversely, this tradeoff will be higher for coins with poor liquidity.
Let me give an example for you to easily imagine:
You buy A for $ 1 with a volume of $ 100 and after a month, the A is worth $ 10. At this point, your fortune has 10 times profit, that is, 1 million dollars.
However, the volume purchased at $ 10 is very small, only $ 100 and the price range from $ 10 to $ 9 has a total volume for $ 1 million.
If you want BURNS Immediately you will have to trade 10% of the profits to sell for $ 9. In return, you will shorten the waiting time to sell all that A coins, almost immediately.
The importance of Liquidity
Liquidity is always a very important issue and is always considered carefully by investors before investing in any market.
Especially, in emerging cryptocurrency markets, liquidity has always been a headache problem for many large capital investors who want to enter the market.
Because Liquidity affects the price, there is a difference between the expected returns and the actual returns of that cryptocurrency.
Suppose, brothers are holding a large amount of token B and are earning 30%. Now, you want to sell token B quickly to earn 30% of that profit. Unfortunately, token B is having very poor liquidity.
If you accept the liquidity will lose about 50% of the value, ie profit from 30%, you will lose 35%.
In case you want to sell but still retain 30% profit, it will take more time to sell at that price.
However, the market is not only traded for you. If you do not sell, there will be others who accept to sell and make the price drop very quickly.
Therefore, the choice of highly liquid coin is always a safe option for large capital investors.
How to check the Liquidity of coins
As I mentioned above, you also understand that liquidity is a major factor that influences trading decisions. Because it shows how easy it is to buy / sell, in / out of any coin.
So before deciding to trade a certain coin, you need to check the liquidity of that coin by checking the following 3 factors:
- 24-hour trading volume.
- Depth of Order Book.
- Difference between bid-ask prices.
24-hour trading volume
Maybe you are interested in:
Remember that this is the total trading volume so you have to see which coin is being traded the most and is the exchange fake or wash trading?
If you are in this category, it is very difficult for you to trade quickly, because most of them are trading bots.
You can refer to the exchanges with the actual volume according to the Bitwise report submitted to the SEC in March 03.
You can read the full report here.
Order Book Depth
After choosing a floor with a real trading volume, you must check the depth of the Order Book on the coin's trading floor.
This helps to estimate the level of liquidity if trading immediately with the desired brother volume.
You want to sell 100 thousand dong A at the price of 0,1 USD and Buy Order Book Depth of dong A shows that at the price of 0,1 $ you only get 40 A and at 0,09 $ you have an extra 60 thousand A more.
From there, you can estimate the difference if you trade the liquidity with trading speed.
Bid-Ask Spread shows the difference between the latest buy and sell orders shown in the order book.
If Bid-Ask Spread is higher, the liquidity of that coin is very low and vice versa.
Here is the Bid-Ask price of DOGE / PAX above Binance Exchange.
You can see the latest buy order of DOGE is 0,0025293 PAX and the latest sell order is 0,0026798 PAX.
So if you execute a buy order, DOGE is purchased at 0,0026798 PAX and can only be sold at 0,0025293 PAX. So you have losses ~ 6%.
You can consider the liquidity of the coins you care about: Coin & Token
Liquidity is always an extremely important factor in any market. Without good liquidity the market will be very difficult to develop.
Returning to the current cryptocurrency market, liquidity is still an important issue that hinders many traditional investors from jumping into this potential market.
Going further, you can see that many of the current coins do not really have good liquidity, although the expected profit margin can be very high.
Hopefully after reading this article, newcomers will not make the mistake of choosing coins that have no liquidity to trade.
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Goodbye and see you again in the upcoming articles!