Markets
The importance of liquidity in the crypto market
In the crypto market, liquidity is a very important parameter.
In fact, among all the parameters, it is the one that individually can have the greatest impact on prices, in addition to individual events of systemic importance.
The role of liquidity in financial markets
With the term “liquidità” we refer to assets that can be traded on the market very easily and quickly.
The most liquid instrument of all is money, especially because it was specifically created to be easily exchangeable and extremely fast.
There are also assets that are extremely difficult to sell, such as those that are blocked until a certain date.
The more an asset can be sold easily and quickly, the more it is considered liquid, so there are different degrees of liquidity.
Money is the most liquid asset there is, while, for example, physical gold is slightly less liquid. Property, by its very nature, is not very liquid, because it takes some time to sell it, while some assets can even be completely illiquid if they cannot be spent (such as seized funds).
In financial markets, in general, traded assets are liquid, except for those that cannot be transferred because they are restricted.
But even in financial markets there are different degrees of liquidity.
In particular, when we talk about financial markets with real liquidity, we are referring to money and assets that are nothing more than different forms of highly liquid money.
In other words, in financial markets, liquidity is simply made up of the most liquid assets. These include money, both in physical and digital format, and very short-term investments considered equivalent to money.
Liquidity in the crypto market
Or crypto market it is just a part of the overall financial market.
Therefore, what applies to traditional financial markets also applies to crypto marketsin relation to liquidity.
What changes, however, are precisely the assets considered liquid in the cryptographic market.
As in traditional financial markets, in the cryptographic market an important part of liquidity is made up of fiat currency.
However, unlike how commonly you think, your crypto and fiat markets are not as easily and quickly spostabile.
For example, to withdraw or deposit fiat currency on exchanges takes from a few minutes to a few days, while with other assets the movement is easier and faster.
This is how in the crypto market most of the liquidity is made up of the token that replicates the fiat value, above the cosiddette stable coin.
To tell the truth, there are also stablecoins not pegged to fiat currencies, such as tokenized gold, but nowadays the term stablecoin is often used as a synonym for tokenized fiat currencies.
The majority of liquidity in crypto markets is made up of tokenized fiat currencies, or stablecoins, with fiat currency a close second. In third place are algorithmic stablecoins, while any other forms of liquidity in crypto markets are practically absent.
How liquidity moves
In financial markets, the most important thing in terms of liquidity is not the amount present, but the speed with which it is traded.
For example, if a billion dollars were traded just once a day, it would have a smaller impact than a million dollars traded more than ten times a day.
Sudden movements of liquidity moving from one asset to another are the real culprits of price volatility.
In general, however, when it comes to long-term price trends, the overall change in liquidity is very important. For example, between 2020 and 2021, when the Fed injected more dollars into financial markets in less than two years than there were in total in 2019, the result was a sharp and sudden overall increase in all prices.
In other words, increased liquidity tends to generate inflation, because it actually triggers an increase in purchasing demand.
Therefore, in the medium-long term, variations in global liquidity are very important, while in the short term, how quickly it moves is more important.
For example, money kept idle in a bank account does not generate the slightest volatility in financial markets, whereas if it is spent on purchasing financial assets it can generate an increase in prices.
The Current State of Crypto: Market and Liquidity
One piece of data that can help understand the current level of liquidity in crypto markets is stablecoin trading volumes.
Among other things, it is important to highlight that practically every day the cryptocurrency that records the highest trading volumes is USDT, which is absolutely one of the most liquid.
Generally, USDT’s daily scam volumes in its crypto markets (around 100 million dollars) are two risks to that of Bitcoin It is Ethereum (reached a proxy of 50 million), and about 10 times higher than that of the second largest stablecoin, USDT (10 million).
Its traditional financial markets, the volume of complex scams in USD is enormously higher, so much so that, for example, Nvidia’s single title is recording daily scam volumes not far removed from those of USDT in its crypto markets, and almost two risks to those of Bitcoin or Ethereum.
Taking global trading volumes across all cryptocurrencies as a reference, the crypto market in recent days has recorded a daily trading volume of over 100 billion dollars, but at the beginning of May it was just 70.
During the peak in mid-March, they rose to 150, which is well below the all-time highs of $300 billion traded on, for example, April 19, 2021.
In other words, the liquidity that circulates in the crypto markets actually varies from day to day, even if with not exaggerated variations, but it varies especially from period to period, with large jumps during the bull run and strong contractions during the bear market. .
Note that these variations not only affect volatility but also prices, and it is precisely for this reason that when there is less liquidity prices tend to be low, while when liquidity increases prices also tend to increase.