#Liquidity101
Understanding Liquidity in Financial Markets and Cryptocurrencies
Introduction
When entering the world of trading or investing, you will hear a lot about "liquidity."
The tag #Liquidity101 is used to explain this vital concept, especially for beginners in the world of crypto or stocks.
But, what is liquidity? And why is it so important?
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What is Liquidity?
Liquidity refers to how easily and quickly an asset (like a cryptocurrency or stock) can be converted to cash without significantly affecting its price.
Types of Liquidity:
🔹 Market Liquidity:
Ease of buying or selling an asset in the market quickly and with the smallest difference between the buying and selling price (Spread).
🔹 Cash Liquidity:
The ability of an individual or institution to meet short-term financial obligations without having to sell assets.
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Why is Liquidity Important?
✅ Fast Execution:
Allows investors to execute trades quickly without delays.
✅ Low Spread:
High liquidity markets enjoy a small difference between the bid and ask price.
✅ Price Stability:
Liquidity reduces sharp price fluctuations.
✅ Strategic Flexibility:
Ease of entering and exiting trades at any time.
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Examples from Cryptocurrencies:
Currency High Liquidity Low Liquidity
BTC / ETH Massive daily trading volume, fast execution Minimal price spread
Obscure coins Slow execution, sometimes difficult to sell Large price spread and sharp fluctuations
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The Relationship Between Liquidity and CEX & DEX
