What is Liquidity in the world of finance? Liquidity in its simplest term, is simply how quickly you can convert an asset into cold cash. Yet, if you will look at it in its entirety, there are some other details involved that affect this as well. As we dig deeper, convertibility into cash is one thing, but the asset also needs to be stable enough as not to affect its price by liquidating it. The most stable kind of liquid asset is actually cash itself. It is very stable and everyone accepts it readily. You can use it literally everywhere for buying and paying for services. This is the reason why cash is the standard to gauge or benchmark the assets “liquidity”. There is also the opposite of Liquidity – Illiquidity which defines assets that are harder to convert into cash. To recap, Liquidity is the “ease” in which you can enter or exit into a particular asset or currency.
When it comes to cryptocurrency, having the best liquidity is an asset and is something that proven Crypto Brokers should advertise. Any tradeable asset should have this in spades! So we know what liquidity is right? Let us take a look at the reasons WHY it is important. In any asset, it is important to have higher liquidity for these number of reasons. Let us take a look at these.
Stability of Pricing
Prices become fairer and more stable if the asset is widely accepted. FOr a cryptocurrency, this means that your chosen currency is robustly traded in terms of buying and selling. This would ensure that sellers would be at their peak competitive pricing which is always better for everybody. Buyers, on the other hand, would be bidding at optimal prices. This will create an equilibrium in the marketplace – and that is a sure sign of market stability. Having this ensure that changes are gradual and will not be prone to large gaps between values. In an unstable market without equilibrium, a single large sale can upset the prices of the asset making it prone to manipulation. With stability, the asset can be traded even if bought in larger quantities by a single buyer WITHOUT affecting its price negatively.
Because of the fast-paced cryptocurrency market, having a stable equilibrium and higher liquidity makes it faster to buy and sell the asset. This is because of the higher number of market participants. This is more and more becoming a need in Cryptocurrency trading as these are usually done online and speed is essential.
When an asset exhibits high liquidity, more and more businesses will accept it in trade as payment. For Cryptocurrency, this is vital that it be accepted as modes of payment in purchases of goods and service. This increases the value of the currency and will cause more and more businesses to accept in their business.