Liquidity – Ability of a market to allow buying and selling of assets at its actual value i.e. a stable price free of discounts or premiums.
Any market is ought to have a better liquidity. Else either the price will have a huge drop or hike or things will go out of control. Fluctuations in price on a long run are better for long term investment. The volatility and liquidity are inversely proportional to each other. When there is better liquidity, price of asset will oscillate less and when there is lack of liquidity, prices oscillations are higher.
This is about liquidity in general and it applies to all the trading and investable assets. Cryptocurrency is also one of those. Though this virtual digital currency was invented with a purpose of peer-to-peer electronic cash system, its volatile nature has made it a tradable asset. Talking about the most popular cryptocurrency “Bitcoin”, its price in the initial years was almost 0 USD. Then in 2011, it crossed 1 USD. The highest price was around 20k in December 2017. Any other traditional asset hasn’t witnessed such a massive growth in such a short span of time.
Liquidity has been a problem in cryptocurrency trading for a while now. The rise in cryptocurrency trading has made way for a number of exchanges i.e. trading platforms. Now, each exchange has a different price for the trading pairs supported and hence a varied trading volume. It’s not always the exchange’s fault. Some coins are such which does not attract potential investors and hence cannot generate proper liquidity. As per the news published a couple of months back, Bittrex announced to remove 82 tokens because of poor liquidity.
There are 1593 coins and their total market cap is 370 billion USD. Right now, the active users of cryptocurrency are from US, UK and Japan. In order to make it acceptable by a majority of people, the problem of liquidity needs to be solved. Because as the awareness about cryptocurrency gears up, more people will start buying and thus increase in price. The price will dive down when crypto holders panic sell off their coin possessions by believing in some fake prediction or regulation of their government. The logic is simple as in general economic market, price goes up when demand increases and price go down when demand decreases.
Encrybit survey revealed that 36% of the participants mentioned that lack of liquidity is a major concern on existing cryptocurrency exchanges. Some crypto experts predict that the progress of decentralized exchanges can overcome the problem of liquidity. But still, decentralized exchanges are yet to rule to the crypto world and only time will tell whether it can solve the problem of liquidity or not.
In today’s date, centralized exchanges are used majorly for trading. As they provide better trading volume and advanced trading functions. As a preventive measure, the current exchanges can make an effort to attract more users like potential investors, professional traders, institutional people, etc. which can generate better liquidity on the exchange. With so many exchanges, it is difficult to maintain liquidity on every exchange.
Again this does not create hindrance in the evolution of cryptocurrencies. Liquidity is just one mere factor and can be managed with some calculative measures. No matter what, cryptocurrency has succeeded in making a firm impression and is strengthening it further.