💧 Liquidity 101 – Explanation of liquidity in the trading world
✅ What is Liquidity?
Liquidity is how easily an asset (like currencies or stocks) can be bought or sold without a significant change in its price.
In other words:
> "The higher the liquidity, the faster you can buy and sell at a fair price."
🔍 Types of liquidity:
1. High liquidity
Many buyers and sellers.
Very small spreads.
Fast order execution.
✅ Example: A coin like Bitcoin or ETH on Binance.
2. Low liquidity
A few buyers and sellers.
Large price spreads.
Executing orders slowly or in multiple parts.
❌ Example: A new obscure coin (Low Cap) on a DEX.
📊 Why is liquidity important in trading?
Reason Explanation
✅ Execution speed You can buy and sell quickly without waiting.
✅ Fair Price The price does not change significantly during the execution of the trade.
✅ Smaller price spreads The difference between the buying and selling price (Spread) is small.
❌ In low liquidity You can lose just because of difficulty selling or a large price difference.
📉 How does liquidity affect price?
In a liquid market:
Selling $1000 of a coin does not change the price significantly.
In a dry market (Illiquid Market):
Selling the same $1000 may cause a significant price drop.
🛠️ Where does liquidity come from?
1. From users (traders):
The more traders there are, the greater the liquidity.
2. From liquidity providers:
They are individuals or systems that inject money into the market to facilitate trading, especially in DEXs like Uniswap.
3. From trading volume:
A large daily trading volume means good liquidity.
🧪 How do you know if a coin or market is liquid?
✅ Monitor:
Daily trading volume (Volume 24h).
The difference between the buying and selling price (Bid/Ask Spread).
Number of orders in the order book.
Practical Example:
You want to buy a small coin on DEX:
The price is $0.10, but after the purchase, it rises to $0.13!
Reason? Weak liquidity!
You yourself affected the price (High Slippage).
Risks of low liquidity:
Risk Impact
Slippage A large difference between the expected price and the executed price.
Difficulty exiting You can't sell when needed, or you sell at a loss.
Market manipulation Facilitates manipulation of low liquidity coin prices.
Summary:
Liquidity = The lifeblood of the market.
Always choose coins and platforms with high liquidity, especially in day trading or scalping.
Follow liquidity on CoinMarketCap or directly from the platform.
