#Liquidity101

Liquidity 101

In the world of finance and cryptocurrencies, liquidity refers to how easily an asset can be bought or sold in the market without significantly affecting its price.1

Think of this:

Liquid Asset: An asset is liquid if you can sell it quickly at a fair price and without large discounts. Imagine Bitcoin (BTC) or Ethereum (ETH). There are millions of people willing to buy and sell them at any time, so you can easily convert your BTC into Guatemalan Quetzals (GTQ) without the price crashing due to your sale.

Example: A bottle of water on a hot day in Central Park of Antigua. Many people want it, and the price is quite standard.

Illiquid Asset: An asset is illiquid if it is difficult to sell it quickly without having to significantly lower its price to find a buyer.

Example: An old and very specific house in a remote area of Guatemala. It could take months or years to sell, and you may have to accept a much lower price than you expected to find a buyer.

Why is liquidity important?

Ease of Entry/Exit: High liquidity allows you to enter and exit trading positions quickly.

Less Slippage: In liquid markets, the difference between the price at which you want to buy/sell and the actual execution price is minimal. In illiquid markets, this difference can be large (greater "slippage").

Stable Prices: Markets with good liquidity tend to have more stable and predictable price movements, as there are enough buyers and sellers absorbing orders.

Lower Risk: It is less risky to trade in liquid markets because you know that if you need to exit a position, you can do so without great difficulty.