Liquidity refers to how easily a cryptocurrency can be bought or sold without significantly affecting its price. High liquidity means there are many buyers and sellers, allowing you to trade large amounts quickly at stable prices. Low liquidity means fewer market participants, resulting in wider bid-ask spreads and price slippage on large orders.

Liquidity is crucial for traders because it affects transaction costs and execution speed. Major cryptocurrencies like Bitcoin and Ethereum have high liquidity across multiple exchanges, while smaller altcoins often suffer from low liquidity, making them harder to trade efficiently.

Key Characteristics of Liquidity

  • Bid-Ask Spread: High liquidity = narrow spread (0.01-0.1%), low liquidity = wide spread (>1%)
  • Slippage: Price impact when buying/selling large amounts
  • Depth: Order book depth indicates available liquidity at different price levels
  • Exchange Comparison: Same asset can have vastly different liquidity across exchanges
  • Market Makers: Provide liquidity by placing buy/sell orders continuously

Real-World Example

Bitcoin has ~$30 billion in daily volume across all exchanges—you can trade millions without moving the price. A micro-cap altcoin with $50,000 daily volume might see a 10% price swing from a single $5,000 trade.

Understanding Liquidity is easier when you're familiar with these related concepts:

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