The liquidity potential brought about by cryptocurrencies was one of the major incentives for the development, and later success, of Bitcoin and other cryptocurrencies as they eliminate the heavy taxes and transaction fee for traders who want to buy or sell goods or services internationally. Now before you start trading Bitcoin, it is necessary to understand what is Bitcoin market liquidity and truly understand its importance and appeals.
What is Market Liquidity
First of all, we will explain the definition of market liquidity to you. Famous American investor Stanley Druckenmiller once said that it is liquidity that moves the market. But what is market liquidity? One of its definition is the ability of an asset to be converted into cash easily. Actually, cash is the most liquid asset because it is stable and as a near-universal stock of value it can be readily accessed and spent.
Therefore, cash is usually used to gauge an asset’s liquidity. Liquid assets share a common feature in that they all have an open market to be traded on, meaning that they are heavily traded globally with prices being more stable that illiquid assets.
Another definition of market liquidity is that as liquidity of an asset grows, the fewer chances there are of having said asset bought, or sold, at a premium or discount but instead sold at its worth.
For cryptocurrencies, liquidity means the ability of a coin to be quickly and easily converted into cash or other coins. Cryptocurrency liquidity has a few characteristics, including tightness, immediacy, and depth. In other words, low transaction fees, the speed at which orders can be executed, the number of orders in the order book and, last but not least, the resiliency, meaning that orders generally stay tied to an average price as traders believe that price to be correct and this keeps the price closely tied to its fundamentals.
What Affects Bitcoin Market Liquidity
Now that you have a basic understanding of what is cryptocurrency market liquidity, let’s go deeper into the Bitcoin market to see what affects Bitcoin market liquidity.
Exchanges are one of the major factors that determine the liquidity. The increasing numbers of Bitcoin exchanges provide more people with platforms to trade their coins on and thus as favored in a wider acceptance of Bitcoin and other cryptocurrencies, as well as more trading options such as derivatives. With more people trading, the frequency and volume of trading increase and thus enhances liquidity. It is, however, important to notice that the increasing number of exchanges does not, per se, increases liquidity, but instead the wider acceptance of Bitcoin and means of exchange.
Secondly, the more Bitcoin is used as the medium of payment, the more liquid they become. Now the numbers of online and offline stores that accept Bitcoins are decreasing. Limited utility as a medium of exchange will definitely affect its value and usage. Many people have low acceptance of an online Bitcoin exchange. The emergence of Bitcoin ATM, debit cards and credit cards have started to have an impact on the public’s acceptance of online Bitcoin transactions because these will make it easier and more convenient to conduct transactions and purchases. These measures help increase the use and acceptance of Bitcoin in real life and will facilitate purchases and withdrawals at the market price and; thus, increase liquidity.
Besides these factors, regulations also play a part in the Bitcoin market liquidity. Although the purpose of trading Bitcoin includes avoiding the manipulation of governments, laws, and regulations still matter a lot when it comes to real-life usage.
Authorities in many countries are observing the situation and working on the regulations. A clear stand of the government or other authorities on issues like consumer rights protection and tax regulations could bring an increase of or stop, people trading Bitcoins, which will surely affect its liquidity.
The last factor is the most important one: public awareness. Many people may have heard about Bitcoins but have never bought or sold them and are unaware of what cryptocurrency is and how it works. The market might lose a lot of potential traders because of limited knowledge and a lack of guidelines. As the world of Bitcoin is expanding and more enthusiasts are flowing in, the rise of public awareness has greatly impacted the liquidity.
This concludes today’s article of what is Bitcoin market liquidity and what affects it. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.