Did you know that liquidity influences the Bitcoin price?
Liquidity refers to the asset’s ability to be covered to cash on demand. A bid-ask spread is determining it. Meaning, there will be no premiums or discounts surrounding assets during selling or buying. This way, you can easily enter or exit the market.
If more items are being bought and sold, then the market tends to become more competitive. Then, the ability to get a discount or charge a premium will diminish. As a result, a particular asset will be traded near the market price.
Keep in mind that liquidity is important to tradable assets, including Bitcoin and other cryptocurrencies. Unlike the illiquid market that puts traders in a position that is hard to exit, the liquid market tends to be smoother and deeper.
What Does Liquidity Mean for Bitcoin
On your favorite exchange, you are watching the 15-minute Bitcoin chart. Then, you noticed that the Bitcoin price is about to fall based on the signals in your strategy. So, you plan to sell off your position. On the other hand, looking at the cost of your trade, you sold your Bitcoin at a lower price compared to what you saw on the exchange. You let your order being executed at a worse price than the price at the top of the order book.
This situation is just a small portion that you can encounter liquidity. As you can notice, it can massively impact your returns when trading cryptos. Once you understand the liquidity of Bitcoin more effectively, it’s a lot easier for you to determine which exchanges you should trade on. Besides, you can also figure out what trades to make and when to trade.
When does asset become more liquid? Any asset becomes more liquid when more people exchange it on a daily basis. Before, only a few people accept Bitcoins at any price. But, nowadays, different exchanges or trading platforms like Crypto Engine can be taken advantage of by a number of people.
Despite being a single asset, Bitcoin can be less or more liquid on various exchanges. For example, if you are on an exchange with a sparse order book, then Bitcoin could be relatively illiquid. Not only that, but you may also be taking more loss if you will exchange it than you will on another exchange. Visit website for more details.
What Are the Characteristic of Liquid Markets
According to Abdourahmane Sarr and Tonny Lyber, liquid markets have five distinct characteristics. These include:
This refers to the quality of a market where new orders will flow in so that imbalances can be corrected. It will also help in keeping the Bitcoin price closely associated with its fundamentals.
This liquid market factor is defined as the high number of large orders.
Depth is a characteristic of a liquid market that refers to a number of limit orders that fill out your order book for Bitcoin.
This refers to the speed at which your order is being executed and settled.
Tightness is defined as the low transaction costs that include the bid-ask spread.
Will Liquidity Be A Problem to Traders
Early these days, when Bitcoin exchanges are being regulated and unregulated, liquidity largely depends on when and when you trade Bitcoins. If you treat all exchanges as equally liquid, then expect that you will unknowingly pay a significant premium on your trades.
With the above ideas, do you think liquidity will help you or at the end of the day, it will hurt you. Don’t worry, as long as you are trading not based on your emotion, and you have a solid trading strategy, you are on the right track.