Most crypto enthusiasts are familiar with the concept of liquidity, as it’s a critical factor in trading. But what does it mean when a market is illiquid? Read on to find out the illiquidity definition!
What Is Illiquidity?
Illiquidity is the opposite of liquidity. The latter term refers to the measure of how easily one can convert an asset into cash or another asset without its price being affected. This means that the more illiquid an asset is, the trickier it could be to sell it quickly without a substantial loss in value.
What You Need To Know About Illiquidity
Illiquidity affects a variety of aspects, including crypto asset prices, market stability, technical analysis accuracy, and transaction speed. The lack of ready buyers often leads to much larger bid-ask spreads than those that would be found in a liquid market.
This means that holding illiquid assets can result in losses, especially when the investor needs to sell them quickly. Thus, crypto enthusiasts are encouraged to deal only with liquid markets, for them to be able to enter and exit their trades easily.
The crypto market is renowned for its volatility, which makes liquidity critical. Traders must exit their positions quickly to prevent price swings from affecting their strategies. Thus, careful traders typically avoid dealing with crypto assets with high illiquidity.
The main factors that affect crypto illiquidity are:
- Trading volume. Bitcoin boasts large trading volumes since many institutional investors are buying it in bulk. For instance, such powerhouses as PayPal and MicroStrategy make billion-dollar purchases, establishing Bitcoin as the most liquid and safest investment in the crypto market.
- Trading platforms. Bigger exchange platforms have advanced security and attract a lot of traders, which creates more liquid trading pools.
- Regulation. In jurisdictions where crypto trading is subject to stringent regulations, the market experiences a high degree of illiquidity.
- Acceptance and popularity. The more people are interested in buying or selling the asset, the more liquid it is.
Note that the assets’ liquidity is reliant on outside market influences, so it may change over time.
