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Let’s talk about liquidity

and why you should care

What is liquidity?

In financial markets, liquidity is the ability to sell an asset without negatively impacting its price quickly. The more liquid an investment, the faster you can sell it. All else being equal, liquid assets should trade at a premium, whereas illiquid assets should trade at a discount.

  • current ratio: assets — liabilities

Benefits and drawbacks of liquidity

Liquidity is generally portrayed positively because it offers investors flexibility and optionality. In a very liquid market, it’s also hard for any market participant to engage in price manipulation.

Looking for Liquidity

If you are interested in trading any asset, you’re probably interested in how liquid they are. So how do you go about figuring that out?

Bitfinex BTC: USD Orderbook
Bitfinex BTC: USD Market Depth

What about liquidity in DeFi?

Things work differently when everything is based on public blockchains and smart contracts. While the first decentralized exchanges worked on a peer-to-peer basis, it wasn’t a great experience because sometimes one had to wait days until someone else wanted to fill an order.

Uniswap USDC/ETH

Liquidity crisis?

The beauty of trading on decentralized exchanges relying on smart contracts is that all trades are transparent, and you never give up custody over your coins. Not so when leaving your funds in a centralized platform like Celsius. On Monday, June 13th, one of the biggest crypto lending platforms announced that it was pausing all withdrawals, transfers, and swaps. Kavita Gupta, a founding managing partner of the Delta Growth Fund, commented that this move was a classic example of lacking liquidity.

Twitter

What can we learn from this?

Liquidity matters. On an individual and a business level. No platform wishes to go bankrupt the way Celsius did. And all it took was stETH trading at a discount and FUD spreading across crypto Twitter.

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Naomi Oba

Writer in Crypto — passionate about financial education, blockchain, books, and food.