Liquidity is the ability you have to convert any asset into cash quickly. It is also an ability to buy or sell a security without affecting the asset’s price. When you’re talking about investments, your liquidity is basically how “easy” it is to buy and sell.
Cash is among the most liquid of assets, since you can use it to buy just about anything. Many stocks traded on the major exchanges are considered fairly liquid, since you can convert them into cash quickly and easily because there is almost always another investor willing to buy your shares.
Other assets might not be so easy to convert into cash or other assets, e.g cryptocurrency.
The approximate amount of time required to convert each type of asset into cash is noted below:
- Cash. No conversion is needed.
- Marketable securities. A few days may be required to convert to cash in most cases.
- Accounts receivable. Will convert to cash in accordance with the company’s normal credit terms, or can be converted to cash immediately by factoring the receivables.
- Inventory. Could require multiple months to convert to cash, depending on turnover levels and the proportion of inventory items for which there is not a ready resale market. It may even be impossible to convert to cash without accepting a significant discount.
- Fixed assets. Conversion to cash depends entirely on the presence of an active after-market for these items.
- Goodwill. This can only be converted to cash upon the sale of the business for an adequate price, and so should be listed last.
- Cryptocurrency. Depends on the trading volume. If the trading volume is low or zero then a cryptocurrency will become illiquid.
The solution for cryptocurrencies is the Bancor protocol, which is a connected network of a new form of cryptocurrencies called Smart Tokens. Its value is determined by the total value of the assets held in its Connector, and grows through fees it might collect from users as they utilize it for conversions. Any standard ERC20 token can be used as a Connector-weight, even if it is already traded in other exchanges. As long as one of the reserves is BNT, it is liquid for everything else that has a BNT connector.
Cryptocurrency exchanges are on the downside right now. China government recently banned all exchanges operating in China. Popular exchanges (such as MtGox and Bitfinex) have been hacked, and hundreds of millions of dollars worth of assets have been stolen from their accounts with the most recent was BItfinex hack. But it does not stop there, current cryptocurrency exchanges will charge you for deposit fee, withdrawal fee and transaction fee, range between 0,2%-3%.
Another drawback is cryptocurrency exchanges must conform to state regulations. In order to comply with these regulations, customers are prompted to verify their identity in order to participate. Regulations vary between country, but exchanges generally must abide by Know Your Customer (KYC) and Anti-Money Laundering (AML) laws.
These are all the problems that Bancor Protocol trying to solve. With a decentralized and automated platform, we can skip all the hassle and stress of current exchanges system, by allowing anyone to instantly trade any currency without need for a 3rd party exchanges.
Converting one token to another using Bancor token changer does not require depositing funds in an exchange and thus removes the counterparty risk from the process on top of reducing the costs of performing conversions.
