If you are investing or trading in cryptocurrencies, it is important to understand the term cryptocurrency liquidity.
The term liquidity is generally used in the financial markets to describe the ease by which an asset can be converted into cash without difficulty. In terms of cryptocurrencies, liquidity is the ability of a coin to be easily converted into cash or other coins.
Liquidity is important for all tradable assets including cryptocurrencies. Low liquidity levels mean that market volatility is present, causing spikes in cryptocurrency prices. High liquidity, on the other hand, means there is a stable market, with few fluctuations in price.
It is thus easier to buy or sell cryptocurrencies in a liquid market since buy or sell orders will be filled more quickly due to the larger number of market participants. Essentially, this means it is possible to enter or exit a trade at any moment, given the fast-paced nature of the cryptocurrency markets.
Volatility in price has been a feature of cryptocurrencies and the liquidity problem is one of several factors that have created sudden movements in prices. Improved liquidity will help tackle this issue but this remains dependent on the extent to which cryptocurrencies are generally accepted. As far as the future is concerned, evidence suggests that cryptocurrency usage will continue to rise and its foothold will increase, ultimately creating better liquidity.