When trading cryptocurrencies, you want to buy and sell quickly at the most favourable rate. Market liquidity allows you to complete your trades without delays.
Liquidity describes how quickly and at what cost an asset can be exchanged for another asset. Liquidity is a measure of how many buyers and sellers are present, how active the market is, and how big their orders are. It can be calculated by taking a volume of market trades and a volume of current pending orders on the market.
In some sense, market liquidity can be compared to popularity, meaning each market and crypto exchange has its liquidity.
If you want to purchase cryptocurrencies immediately, you need to pay the current market rate. High liquidity allows you to buy and sell a cryptocurrency for a price close to what you’ve asked without waiting for a long time. The more orders are in the order book, the more liquid the crypto platform is.
You can look at the order book on the Spot Trading page of the CEX.IO website.
Liquidity is considered “high” when there is a significant level of trading activity, a lot of market participants, and high supply and demand in the market. It helps buyers and sellers easier to find each other and provides fewer chances that one particular order may affect a drastic price change. But if there are only a few market participants and trading activity is low, then such a market can be considered low-liquid or even illiquid.
Liquidity is a dynamic indicator that constantly shifts from high to low depending on trading activity and volume. When trading, market liquidity significantly impacts how quickly you can open and close positions, and how big the difference is between buying and selling prices. It means liquidity is one of the key factors in determining spread. In general, when markets become more liquid, the bid-ask spread should tighten and vice versa. But high liquidity does not always mean a balance between buyers and sellers. That is why in the case of a significant imbalance, it can be more difficult to fill your order.