Cryptocurrency liquidity – what is it

Cryptocurrency liquidity – what is it

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crypto industry is actively developing, and every year more and more people invest in digital assets. Despite the popularity of the crypt, many still do not know how the value of a virtual currency is provided, what is the liquidity of a cryptocurrency . We will tell you how liquidity is provided and why it is important to monitor this indicator.

What is cryptocurrency liquidity in simple words ?

Liquidity determines how easy it is to transact with an asset. In simple words, the liquidity of cryptocurrencies is an indicator of the speed and ease of buying and selling, converting one virtual coin into another or fiat currency. The lower the liquidity, the higher the volatility, that is, the unpredictability and volatility of the exchange rate. The high liquidity of the cryptocurrency exchange means small price fluctuations, so investors and traders in such markets feel more confident.

What factors can affect liquidity:

  • Trading volume. The more market participants are interested in buying a particular coin, the higher its liquidity, and transactions are completed faster. Special services, for example, CoinMarketCap , help to monitor the daily trading volume .

  • functionality and distribution. The more business representatives are willing to accept cryptocurrency as payment for goods or services, the higher its liquidity.

  • Commission size. Low commissions encourage traders to trade the coin more actively, which has a positive effect on its liquidity.

What does the cryptocurrency liquidity pool mean ?

In trading , there is the concept of a cryptocurrency liquidity pool , which is also important for a novice player to understand on the exchange. Pools are especially actively used by decentralized exchanges.

cryptocurrency liquidity pool is a collection of all tokens that owners have locked in a smart contract. The pool is necessary to provide decentralized trading , lending and perform a number of other functions that increase the efficiency and profitability of the exchange. Users who agree to send their crypto to the pool are called liquidity providers. They should add to the cryptocurrency liquidity pool equal sum of two tokens , the pair and the rate are determined by the creators of the pool. In exchange for providing liquidity, the user of the platform receives a profit, he earns on commissions from trading transactions performed within the pool. The commission is distributed among all providers in proportion to the amount of liquidity provided.

By sending a crypto to a smart contract, the owner refuses to use it for a fixed period, for which he receives tokens LP ( Liquidity providing ). Cryptocurrency liquidity is blocked so that neither the user nor the developer can deceive each other. Blocking is a protective mechanism, it prohibits the owner from selling the asset sent to the pool, and the developer himself cannot escape with the investor ‘s cryptocurrency . When the liquidity provider decides to withdraw his coins, he needs to burn the tokens L.P. _

Why is liquidity in cryptocurrencies important?

Carefully delving into the topic, it is not difficult to understand what the liquidity of the crypt is and how it is formed. But not everyone understands why a trader needs this knowledge. And they help to earn more efficiently and solve several problems:

  • Protect against manipulation. Large players manipulate traders in markets with low liquidity, so you should choose highly liquid platforms for trading.

  • Transaction acceleration. The higher the liquidity of the asset, the faster the deal goes through. This is especially important for traders who choose a day trading strategy or scalping .

  • Effective technical analysis. In highly liquid markets, technical analysis tools provide more accurate results, helping you make correct predictions.

Learn how to properly analyze the liquidity of digital assets and successfully trade on the stock exchange by taking a course in Crypto Crew ! We will help you understand all the complex topics that a trader needs to trade on the crypto market and invest, as well as start earning on crypto with minimal risks and without serious investments.