Guide – Liquidity in Crypto

I get a lot of questions about liquidity…

What really is liquidity and why is it important in the crypto market?

To answer this, I’ve created a guide below (liquidity in crypto explained!).




What’s liquidity in crypto?

Illiquid assets are investments that cannot be quickly converted into cash. Below are some of the topics we will discuss in today’s thread: What Are Liquid Assets? Does Liquidity Really Impact Risk Level?

In a nutshell, when we talk about liquidity, the question we’re asking is how easy is it to convert the asset to cash at a fair price. The easier this process is, the more liquid the asset is.

What does this have to do with crypto, you might be asking? Time to discuss!


Is crypto liquid?

Always remember that not all assets that seem inherently liquid are Cryptocurrencies, for instance, [aren’t liquid].

Many people in the cryptocurrency industry have always believed that they could always sell their cryptocurrency as long as it was secure. However, this is untrue. “More popular projects [like Bitcoin] typically have higher levels of liquidity.” On the other hand, less well-liked projects run the danger of having more sellers than buyers, which frequently affects the price.


Does Liquidity Really Impact Risk Level?

Simply put, a project becomes less liquid and frequently starts to lose value when more individuals are selling its token than than buying it. Due to challenging market conditions or cash flow issues within the projects they have invested in, a liquid asset may become illiquid. This is why investors need to take liquidity risk into account. Since cryptocurrency is still relatively new, liquidity risk is something that all investors should have at the top of their minds. as liquidity risk is an issue in any market.

Some products start off great, but then they run into problems, affecting their investors. Using the cryptocurrency lending platform Celsius which just filed for bankruptcy, as an example: People had lent their Bitcoin and their other crypto assets, expecting to get major returns, but now their assets are gone.


What Can Be Done?

Therefore, for the majority of people who cannot afford to hire financial advisers, one way to stay on top of liquidity risk is to stay up-to-date. That is, before investing in any project, always do proper research, find out when it was launched, and make sure it has a proven track record.

If I want to invest in Ethereum or Bitcoin, for instance, I can see its consistency over the years and its underlying values. I’m able to recognise that there are willing buyers and sellers on different exchanges around the world.
Liquidity does not necessarily mean lower risk; it just means decisions can be executed faster.


Final Thoughts

In conclusion, the term “liquid assets” refers to those assets that have a ready pool of buyers willing to pay the market price. In contrast, illiquid assets are those with few buyers. With an illiquid asset, the owner may have to wait a while to find a buyer willing to purchase the asset. While on the crypto space, many projects seem to have liquidity at their initial stages of launch, but after a short time, this liquidity could be drained. This can either be done by the project owners or by a huge number of sellers in the market, hence leading to rugpull. As a result, these cryptocurrencies cannot be exchanged for other cryptocurrencies in the space or converted to cash hence making them an illiquid asset.



Thanks a lot for reading this guide! Hope you have enjoyed/learned something from it! Be sure to have a look at the other guides as well by clicking here! And don’t forget to follow us on Twitter: @AltCryptoGems.

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