Liquidity

Liquidity measures how easily a cryptocurrency can be quickly converted to cash without losing value.

Liquidity refers to how easily a cryptocurrency can be converted into cash without losing value.

Bitcoin, the first and most actively traded cryptocurrency, is widely regarded as the most liquid digital asset. Liquidity is also a key factor when evaluating exchanges, as platforms with higher user activity enable instant trades between fiat and crypto with minimal price slippage. In competitive markets, high liquidity reduces price distortions, ensuring assets trade close to their market value.

For example, the forex market is the most liquid globally, with daily transactions averaging $6.6 trillion as of April 2019, according to the Bank for International Settlements. In contrast, real estate is considered illiquid due to lengthy processes, paperwork, and other variables affecting sales.

Liquid markets are preferred by traders as they allow easy entry and exit from positions. Illiquid markets, on the other hand, create challenges in executing trades efficiently.

Bitcoin’s trading volumes now exceed tens of billions daily, reflecting significant growth since 2014. However, it has faced periods of low liquidity, such as during the 2018 market crash, when volumes dropped to about $5 billion per day.

As cryptocurrency adoption grows and virtual assets gain acceptance as payment methods, liquidity is expected to improve further.