It is believed in the cryptocurrency community that with the launch of spot Bitcoin exchange-traded funds (ETFs) in the United States, the crypto market will experience an influx of new liquidity. According to the analytical company Chainalysis, North America is the largest cryptocurrency market, with an annual turnover of approximately $1.2 trillion. This amount exceeds 24% of the global annual cryptocurrency transaction volume, writes RBC Crypto.
Leading market makers have already announced their readiness to provide liquidity for BlackRock ETFs. It is the insufficient liquidity of the market that analysts call one of the reasons for the sharp jumps in the price of the first cryptocurrency.
The term “liquidity” is heard more often than others when cryptocurrency exchanges are compared according to various parameters. Other characteristics, such as security or fees, are also extremely important, but it is liquidity that has the most significant impact on the ability to get the optimal exchange rate for crypto assets on the site.
Liquidity is essentially an assessment of the ability to buy or sell a particular asset at its current fair market value. For example, if you have Bitcoin and want to exchange it for dollars, then there must be enough demand on the buyer side for you to be able to sell at the current rate.
If you want to sell $1 million worth of bitcoin, but there are only $500,000 worth of buy orders close to the current market rate, then you will sell some of your bitcoins at a lower price. Additionally, your sell order will lower the current price of Bitcoin because there were not enough buy orders at your requested sell price. A phenomenon such as the inability to buy or sell a specific asset at a market price in large volumes is called slippage.
Cash is considered the most liquid asset in the world, since it can be used to purchase almost anything without slippage. Although Bitcoin is a form of digital money, its liquidity is nowhere near that of fiat currencies.
Liquidity and trading volume
Liquidity is often confused with trading volume, but they are two different concepts. There is usually a strong relationship between liquidity and volume, but high volume does not necessarily mean high liquidity.
Trading volume is a measure of the value of trades made over a period of time, usually measured on a daily basis. Liquidity has more to do with the buy and sell orders that are currently on the order books. In other words, trading volume is an indicator of transactions that have already taken place, and liquidity is the number of buy and sell offers that can currently be executed on the exchange.
There is not always a direct relationship between trading volume and liquidity, but an exchange with high trading volume still attracts more traders. When it comes to cryptocurrency exchanges, there is a strong network effect as everyone strives to get into the exchange with the most liquid market (due to the high level of user activity).
High trading volumes can attract new traders to the cryptocurrency exchange, which will lead to an increase in the number of buy and sell orders held on the balance sheet at any given time, and therefore to an increase in the level of liquidity. This has a compounding effect, as higher volumes and more users usually mean the exchange can offer better fees and rates, which only makes it more valuable compared to other exchanges.
How liquid is Bitcoin?
From the point of view of the cryptocurrency market, there is no more liquid asset than Bitcoin. However, “whales” are still able to influence the Bitcoin rate through large buy and sell orders. There are a number of reasons for this, one of which is that there are dozens of different exchanges, and this creates discrepancies in prices across all markets. If all cryptocurrency transactions were conducted on a single centralized exchange, the market would undoubtedly be more liquid.
In traditional markets, liquidity is concentrated on a single exchange. For example, all transactions in Apple shares are carried out through the NASDAQ exchange. In the case of cryptocurrencies, liquidity is distributed among a large number of different platforms. Although, as already mentioned, the network effect usually leads to the fact that most traders use only the largest platforms – Binance, Coinbase, OKX, Bybit, Bitfinex and a few others.
A liquid asset is an asset that can be quickly converted into fiat money at a rate that is not much different from the price that can be obtained on the open market. Bitcoin can indeed be exchanged quickly, but when transferring really large amounts there may be some slippage (price impact).
Exchange liquidity and cryptocurrency liquidity
The difference between exchange and cryptocurrency liquidity is related to which indicator is measured. If we are talking about an exchange, the amount of a specific crypto asset that can be sold on this exchange without encountering serious slippage is measured. When measuring the liquidity of a particular cryptocurrency, it is necessary to consider all possible ways that cryptocurrency can be converted into fiat money or other assets.
When assessing the liquidity of a particular cryptocurrency, you should pay attention to the order books (so-called order books) of all exchanges on which this asset can be traded. There are other variables, for example, whether this cryptocurrency can be used to pay for goods or services. Bitcoin liquidity and trading volumes have increased significantly since its inception in 2009. Other highly liquid crypto assets include, for example, the stablecoin Tether USD (USDT) or other coins from the top ten by capitalization.
The cryptocurrency exchanges with the most liquidity are also usually the exchanges with the highest trading volumes. Currently, the Binance exchange is experiencing the greatest Bitcoin activity for the BTC/USDT trading pair. Binance is also considered the main trading platform for most altcoins.
To trade a specific altcoin, you should pay attention to the trading volumes and liquidity of this particular crypto asset, and not all crypto tokens traded on the exchange together. Less capitalized altcoins are often traded on niche, less popular exchanges that have more affordable coin listing conditions.
In addition, there are over-the-counter (OTC) brokers that help investors who want to trade large amounts of cryptocurrency while minimizing price impact.
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