Liquidity refers to those topics that will always be popular both in the crypto community and beyond. We are sure that there is no crypto enthusiast who has not heard of Bitcoin Liquidity. But how to calculate liquidity and how to find the most liquid exchange? First.
SummaryA bit of terminologyHow to spot the liquidity of crypto-assets? Registration on exchanges. Use outside industry. Popularization. Price, daily volume, capitalization.Calculation of cryptocurrency liquidityCryptocurrency liquidity as an indicator of confidenceChoosing a liquid exchangeChoosing a cryptocurrency pair to tradeCurrent situationConclusionLiquidity is a key parameter of an asset, which means its quick sale at the current cost. For example, traditional money has the greatest liquidity, since other assets can be purchased for them at market price and at any time. But illiquid assets can be considered harder to sell. For example, artwork, real estate, jewelry, etc.
Thus, liquidity can be seen as an opportunity to sell assets on the market without causing large variations in their cost. Moreover, liquidity is inherent not only to assets but to the market as a whole. Let's examine these areas and determine how liquidity affects trading activities in the cryptocurrency market.
Active participants, who make movements in the market, determine its liquidity. In addition, an asset can be considered liquid if it can be converted simply into traditional funds.
At the same time, cryptocurrency liquidity is determined by a combination of factors such as popularity and application. In other words, the greater its volume of exchange, as well as the higher the possibility of its use when buying/selling goods or services, the more this cryptocurrency is considered liquid.
The liquidity indicator is used by traders when developing their trading strategies, as it helps to increase the chances of a correct price prediction. One of the things to understand is that in case of low liquidity, the asset is subject to strong variations in the exchange rate, as well as a slippage is often inherent to it. Thus, the trader risks losing potential profit.
To determine liquidity, you need to pay attention to some factors:
The presence of assets on the trading platforms increases its liquidity. The more exchanges have listed an asset, the more opportunities there are for traders to exploit it. Thus, the volume of trade increases. But in general, new cryptocurrencies are characterized by low liquidity due to their non-presence on major exchanges.
The liquidity of cryptocurrency is also affected by its use outside the cryptocurrency market. For example, when a virtual asset is accepted as payment for goods or services. Bitcoin is the most liquid virtual asset because you can pay with it for hotels, for goods and it is easy to buy it on all exchanges. That is, it has a wide reach, which indicates its high liquidity.
The more the crypto community evolves, the more the assets are liquid. This fact is undeniable and proof of this is the rise of Bitcoin after 2017, when this coin started to be particularly popular with investors. Thus, its trading volume has increased tenfold, and so far, Bitcoin is the most liquid asset on the market. However, if the cryptocurrency is new and enough crypto enthusiasts have not heard of it yet, then the asset is considered illiquid. At the same time, the asset has every chance to change its position, attracting attention to itself with marketing activities and constant development.
You can calculate the approximate liquidity of the cryptocurrency using its rate, capitalization, and daily volume. High price and volume in the past 24 hours demonstrates demand for an asset in the market. At the same time, having studied these indicators for several days, you can determine the trend and make an approximate forecast regarding the behavior of the currency in the future.
Based on the above factors and knowing how to analyze them, the trader will be able to make a more correct choice of a tool for making a forecast.
If we make an analogy of the crypto-currency market with the financial market, then we can note a certain difference with respect to the liquidity parameter. The fact is that in financial analysis it is possible to calculate the liquidity coefficient. However, a specific formula does not exist in the virtual asset market due to the many factors we have discussed above that affect cryptocurrency liquidity.
Generally speaking, it is possible to calculate the approximate liquidity of an asset using capitalization and price indicators. To do this, divide the daily trading volume by the rate of the asset. Parameters of daily trading rate and volume are used by traders to make a decision on buying an asset, as well as to predict subsequent price movements. A decrease in the parameter indicates the approximation of the downtrend (rate of decline) and vice versa.
As you have noticed, calculating liquidity is not an easy process, which is why BonCrypto offers its users Liquidity Checker. With this tool, you can find the most liquid exchange and trade your favorite pairs.
The liquidity of cryptocurrencies is undoubtedly an important parameter that you should pay attention to when building your trading activity. After all, liquidity primarily determines confidence on the part of current and potential traders or investors.
Low liquidity is often the subject of speculation and pumping and dumping. It is easier for scammers to influence the price by selling or buying a large number of coins. If unscrupulous market participants sell cryptocurrency in large volumes, a price drop occurs. They take advantage of this and buy assets, then wait for their price to rise and sell, thus getting the difference.
Attackers can also buy an asset in large volumes, thereby artificially driving up the price, creating excitement around it. And as soon as the exchange rate reaches its maximum value, a large number of coins/tokens will again be strongly released on the market, thus exposing other participants (often beginners) to a loss of funds.
The level of liquidity is one of the main parameters by which the exchange should also be selected. We have already discovered that liquidity demonstrates the activity of traders. Thus, a crypto exchange with a good liquidity indicator has a high trading volume. In turn, liquidity makes trading much faster and easier. At the same time, it should be noted that the liquidity of exchanges depends on geographical location and jurisdiction.
An example of the consequences of low liquidity is the collapse of XRP by almost 60% this winter. On the BitMEX exchange, following an instantaneous collapse in the exchange rate, the token at one point fell to $0.13.
The reason for this fall was the low liquidity of the XRP/USD market, which BitMEX launched, depriving its traders of funds.
After analyzing the market and identifying current trends, traders need to choose the best trading pair.
In general, it is not difficult. First, you need to figure out which pairs are the most popular. Traditionally, there are a lot of orders with crypto/USD pairs, and when it comes to cryptocurrency pairs, the main ones are BTC/ETH, BTC/LTC, USDT/BTC and others.
This situation takes into account the high demand for them – they are very liquid assets. The greater the liquidity, the more opportunities open up in the market. Moreover, this indicator also affects how much profit you can get from each trade.
Most traders prefer Bitcoin as their base cryptocurrency. We have already mentioned that this cryptocurrency meets all the factors of high liquidity – it is the most popular, it is simple to buy and it can be easily mined outside of trading activities.
Of course, Ethereum is also in high demand and a great choice for trading pairs due to its popularity due to smart contracts.
We would also like to mention Tether as the base cryptocurrency for many pairs. This asset is one of the most stable today, it is used all over the world, since its exchange rate is linked to the USD, but at the same time it has all the advantages of virtual currency.
Choosing the best trading pair also depends on the exchange you are trading on.
It should be noted that in 2020 the cryptocurrency market has become more massive. There is a trend to use cryptocurrencies as payment methods. Due to this, the market becomes more stable and affordable.
It's no surprise that USDT is the cryptocurrency with the highest trading volume, and Tether/Bitcoin, Tether/Ethereum, Tether/Ripple, and Tether/EOS pairs remain at the peak of popularity. /P>
The success of EOS is ensured by the latest updates, thanks to which its blockchain has become faster and more secure.
It is also worth noting the pairs with TRX. After Tron was recognized as one of the best content sharing platforms, the Tron Foundation acquired new investors and the price of TRX rose. TRX/BTC, TRX/XRP and TRX/ETH pairs are particularly popular in the Asian market, so you may want to pay attention to them when trading on exchanges such as OKEx and Huobi.
In conclusion, liquidity is an important indicator when choosing an asset and a trading platform, of course. The more popular the cryptocurrency, the greater its volume and the less exposure to volatility. At the same time, for a full analysis, you need to carefully approach the choice of exchange, as well as comprehensively use other methods. Only then can you develop your strategy and make the most accurate predictions.
