๐ What is Liquidity?
Liquidity = How easily and quickly you can buy/sell an asset without moving the price too far.
๐ The higher the liquidity, the easier it is to trade at a fair price.
๐ The lower the liquidity, the greater the slippage and volatility.
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๐งช Simple Example
Liquid market: You buy 1 BTC, the price hardly changes.
Illiquid market: You buy 1 BTC, the price suddenly rises dramatically because the order book is thin.
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๐ Characteristics of Liquid Assets/Pairs:
โ High transaction volume
โ Many buyers & sellers
โ Small spread (the difference between buying and selling price)
โ Thick order book
Example:
BTC/USDT โ Very liquid
Small altcoins / new tokens โ Tend to be illiquid
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๐งฑ Types of Liquidity:
1. Market Liquidity
How actively the asset is traded in the market.
Affected by volume, spread, and trader activity.
2. Exchange Liquidity
How large the asset reserves held by the exchange are to meet user orders.
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โ ๏ธ Risks of Illiquid Assets
๐ High slippage: Buying/selling prices become suboptimal
โณ Orders are hard to execute
๐ข Prices can be easily moved by large traders (whales)
๐ Vulnerable to market manipulation & rug pulls
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๐ง Tips to Avoid Illiquid Assets:
โ๏ธ Always check the 24-hour volume
โ๏ธ Look at the bid-ask spread
โ๏ธ Avoid FOMO on new tokens without volume
โ๏ธ Use CEX/DEX with a high reputation
