#Liquidity101 ๐ง #Liquidity101 โ Understand the Flow of Money in Markets
What is Liquidity?
Liquidity refers to how easily an asset can be bought or sold without significantly changing its price.
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๐น Types of Liquidity
1. Market Liquidity
Measures how quickly you can trade an asset.
๐ Example: Bitcoin has high market liquidity on Binance because lots of people are buying and selling it.
2. Asset Liquidity
How easily a specific asset (e.g., real estate vs. crypto) can be converted into cash.
๐ฐ Cash = most liquid asset, land/property = less liquid.
3. Exchange Liquidity
Refers to the amount of volume and depth on a trading platform.
๐ A deep order book = better exchange liquidity.
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๐น Why Liquidity Matters
โ Tighter spreads (less difference between buy/sell prices)
โ Faster trades with less slippage
โ Fairer prices for everyone
โ Low liquidity means more volatility & difficulty exiting positions
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๐น In Crypto: DEX vs CEX
Centralized Exchange (CEX) like Binance or Coinbase
โ Often more liquid due to large user base.
Decentralized Exchange (DEX) like Uniswap
๐ง Uses liquidity pools โ liquidity is provided by users (LPs).
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๐น Key Liquidity Metrics
๐ธ Volume โ Higher trading volume = more liquidity
๐ธ Bid-Ask Spread โ Tighter = more liquid
๐ธ Slippage โ Less slippage = better liquidity
๐ธ TVL (Total Value Locked) โ Used in DeFi to gauge liquidity pool size
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๐ TL;DR:
> Liquidity = How easily & efficiently you can trade
More liquidity = Healthier, safer, smoother markets