#Liquidity101

🔍 1. What is Liquidity?

Liquidity measures how easily you can buy or sell an asset at or near its market value.

• Highly liquid assets, like BTC or ETH, have tight bid‑ask spreads, deep order books, and high trading volumes—so large trades don’t significantly move the price   .

• In illiquid markets, even small trades can cause big price swings or delays .

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📊 2. Why Liquidity Matters

• Execution efficiency: Enables fast trade fills at expected prices .

• Lower costs: Reduced slippage and tighter spreads save you money .

• Market resilience: Liquid markets resist manipulation and remain stable during volatility .

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⚙️ 3. Key Liquidity Metrics

• Trading volume: Higher volume generally equals better liquidity .

• Order book depth: Looks at how many orders exist at various price levels .

• Bid–ask spread: The smaller it is, the more liquid the asset .

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💱 4. Liquidity in Crypto Contexts

• Centralized exchanges (CEXs): Market makers and high-volume traders ensure liquidity .

• Decentralized exchanges (DEXs): Use liquidity pools via automated market makers (AMMs) like Uniswap v3 .

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⚠️ 5. Risks of Low Liquidity

• High slippage: Your trade may execute far from the expected price.

• Execution delays or failures: Hard to enter/exit positions.

• Higher volatility & manipulation: Price can swing wildly with small trades .

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🧭 6. How Liquidity Varies

• New tokens often have low liquidity and risk “exit liquidity” traps when whales cash out