Understanding Liquidity
A common topic amongst cryptocurrency traders and investors is liquidity. Today we will take a look at what liquidity is and why we, as traders, are interested in participating in a market that offers us sufficient liquidity.
Liquidity is the degree to which an asset can be quickly bought or sold in the market without affecting the price of the asset. The more active market participants you have in the market, the more liquidity you will be able to find in it.
The size of the market is not always the best indicator of how liquid it might be. For example, real estate is estimated to be trillions of dollars as an asset class. However, buying and selling property takes time. Whereas buying and selling an equity share of a real estate developer on a stock exchange can be done in seconds. So, although both assets are related, one is more liquid than the other.
Coming back to our market in crypto, we can look at some parameters that help us gauge liquidity in the market we want to trade. One of such parameters is the daily volume of the market. If we take BTC as an example, we can quickly see on Coinmarketcap that BTC has a current volume of roughly $9 million across all exchanges. We also see the market capitalization and the volume relating to it. The higher the percentage of volume related to the market cap, the more liquidity we can expect.
Together with the daily volume, we can take the order book into consideration that shows us the number of buyers and sellers currently participating in our exchange. Most exchanges, like Bokka, will allow you to see the order book and depth of market for that particular exchange. This is represented as orders at each level or, graphically, as a depth of market. The more orders resting in the book, the more liquid the market is and the more a trader is able to sell or buy into those orders without affecting the price too much. However, it should be said that limit orders can be cancelled and changed.
A shallow depth of market or thin order book means that the trader will either need to trade at a level lower or higher than what is ideal or set an order and wait some time for it to be filled. The larger the block he wants to buy or sell, the more this is magnified.
Here is what your order book and depth of market look like on your Bokka Exchange Mobile interface on Android or iOS:
You can view your order book and depth of market on your Bokka Exchange Web trading interface as well:
Liquidity is important to consider in your trades because of how it relates to your position size and ability to get in and out of your selected market quickly. Today, large-cap cryptocurrencies have sufficient liquidity to move around a fair amount of money, but the lower the capitalization and volume, the more you might consider buying and selling in smaller chunks to get the best return on your trading capital.
Cryptocurrencies have come a long way maturing as a market. Large-cap coins today provide ample liquidity for you to take advantage of movements in price and trade for profit. At Bokka, we are constantly looking to provide you with the best tools to be aware of the liquidity in the markets you want to trade and take this into consideration when we list new tokens and coins to bring you new opportunities in active markets.
