What Is a Liquid Market?

A trade market is usually classified into a liquid market or a thin market. 

A liquid market features a large number of buyers and sellers. It is a platform where all the trades are executed with ease and at a low cost. This free-flowing state of a market is termed as “liquid”.

The exact opposite of such a market is a thin market where the difference between available buyers and available sellers is huge. Typically, there is a low number of available buyers and sellers.

An example of a liquid market would be one of the biggest stock exchanges, the New York Stock Exchange, where millions of shares are traded every day. Such a high volume of trades and easily executable transactions occur at low costs, which implies that the market is liquid. 

In contrast to that, real estate isn’t a liquid market because of the limited buyers in the market. Although, in some regions of the world, the number of sellers in this market are found in abundance. Not to mention, the transaction process in real estate is complex too as it requires the processing of multiple documentation and banking activities.

Cryptocurrency Liquidity

Liquidity is important for all assets classes. In the crypto market, the liquidity of a coin/token is defined as the ability of the crypto asset to be easily converted into cash or other cryptocurrencies.

Why Does Liquidity Matter?

When a market is liquid enough, it creates an equilibrium market price that is accepted by all. In such a market, it is quite difficult to manipulate the price due to the equality between buyers and sellers. Therefore, for a healthy trading environment, it is quite necessary for traders to go for an asset with a high level of liquidity. 

Liquidity brings stability to prices. Otherwise, large trades can cause huge swings in prices, which in turn, increase volatility and risks in the market. It also allows both buyers and sellers to close the trade quickly, leading to a tighter bid-ask spread.

Factors Affecting Liquidity

One of the factors that affect the crypto market’s liquidity is the trading volume. If the daily trading volume of a crypto token/coin is higher, it means that a lot of people are buying and selling it. Opportunities for crypto trading are increasing with the growing number of exchanges. It is another factor contributing to its liquidity as a whole as it opens gates to mass adoption.

Usability is another factor that affects liquidity. With more people and merchants accepting cryptocurrencies as a payment medium, it is becoming more liquid.