It’s what allows investors to buy and sell assets with ease, efficiency, and minimal price impact.
But what happens when liquidity dries up? Let’s explore.
Simply, it’s the ability to quickly convert an asset into cash without affecting the asset’s price.
High liquidity = smooth trading experience
Low liquidity = potential issues for traders
Reduces transaction costs
Ensures accurate pricing
Facilitates faster execution
Minimizes price slippage
Lowers the impact of large orders on the market
Wider bid-ask spreads: Greater difference between the highest price someone is willing to pay and the lowest price someone is willing to sell
Increased price volatility: Rapid and unpredictable price movements
Low liquidity can also lead to flash crashes, where prices plummet rapidly due to a lack of buyers. This can result in massive losses for traders holding the asset and can even trigger a domino effect on other markets.
Use limit orders to avoid slippage
Trade during peak hours for higher liquidity
Diversify your portfolio
Monitor market news and events that could impact liquidity
Whales, or large investors with a lot of money, can also have an impact on market liquidity in low liquidity environments.
Be on the lookout for the following:
We want high liquidity when trading so that we can have smooth transactions, accurate pricing, and minimized risks. Market makers like Wintermute, B2C2, and GSR help provide some of that liquidity.
Remember to join The Crypto Whisperer and check here periodically for updates to OG. We have a lot of new features currently being tested and are excited to roll them out in the near future. Don’t forget to follow us on Twitter, Telegram, and Instagram for the latest updates!