What is liquidity?

Liquidity refers to how easily and quickly an asset (like stocks or cryptocurrencies) can be converted into cash or another asset without significantly affecting its price.

• If the asset is highly liquid, it means you can buy or sell it quickly and at a price close to the current price, like popular currencies (Bitcoin, Ethereum) or major stocks.

• If the asset is low in liquidity, it may be difficult to sell or buy this asset quickly without its price changing significantly, like small cryptocurrencies or rare assets.

Why is liquidity important?

• High liquidity means that the market is active and trading is easy.

• Low liquidity can lead to significant price fluctuations and difficulty in entering or exiting the market.

Liquidity in the world of cryptocurrencies

In decentralized trading platforms (DEX), there are what are called liquidity pools, which are collections of currencies that users place in smart contracts to facilitate trading between different currencies. The more liquidity in these pools, the easier and cheaper trading becomes due to reduced slippage.