In this article:
- What is liquidity?
- What affects liquidity.
- Calculation of cryptocurrency liquidity.
Factors that influence the currency choice
Coins from the TOP 10 of Coinmarketcap are traditionally attractive for trading and investing. 4 basic factors are used for estimating:
- stable appreciation,
- prospects for the future development of the ecosystem,
- developers’ reputation,
- high liquidity.
What is liquidity
There is no strict definition of liquidity in crypto, because the parameter is influenced by too many factors.
In the cryptocurrency, liquidity refers to the willingness of market participants to trade the coin, and how widespread the price of the asset is.
The size of the speculative profit is a profit, which is obtained on the difference in rates, depends on the liquidity of the coin.
What affects the liquidity
the more, the higher is the liquidity.
Capitalization is the total value of an asset in the market. In order to calculate it, the number of released coins is multiplied by the cost of one unit. Such stats are published by Coinmarketcap.com, it is the start of a suitable token selection.
2. Trading volume
You may be surprised, but the more it is, the higher the liquidity of the coin. The volume is displayed on the same site in the column Volume (24h): the trading volume for the last day. It shows demand for the specific coin on the market.
3. The price, this factor mostly depends on the previous two.
They will help you to calculate the approximate liquidity of the coin. A comparison with last days shows a trend. Take account a course and a trading volume per day to determine whether to buy a coin. A disadvantage is that with a small volume of trade makes it harder to sell cryptocurrency inasmuch as lower liquidity and exchange rate prices.
There are some additional factors affecting liquidity:
4. Exchange availability: the more exchanges where the coin is listed, the higher the volume and liquidity.
Low liquidity of new cryptocurrencies is often caused by the fact that nobody trades with them, or they do not exist on large stock exchanges.
5. The turnover of coins in goods and services trading. A variety of ways to use coin makes people trust in its value, and liquidity becomes higher.
This factor depends on the number of outlets where the token is accepted as payment. More companies, stores, estate agencies, travel agencies, and other structures use the coin, the turnover increases, liquidity increases.
You can book a hotel room and pay in Bitcoin, buy goods in numerous online stores, exchange assets using the exchange.
In Australia, you can buy BTC in shops around 3,000 Bitcoin: ATMs work around the world. Wirex, CoinsBank, CryptoPay, and other debit cards, you can withdraw cryptocurrencies in a fiat ATM.
6. The number of fans. The more people know, love and use the coin, the higher is its liquidity. Bitcoin became famous in 2017, when its price soared from $1,000 up to $20,000, and those who underestimated it for investment changed their views. At the initial stage, only cryptocurrency network adepts know about the virtual coin, so liquidity is low. A boost in popularity can be achieved with a large coin deal.
How to calculate cryptocurrency liquidity
The main criterion is the volume of trade transactions for the period: as a rule, within 24 hours, but sometimes indicators are applied to monthly or weekly intervals.
For example, let’s consider Bitcoin, now it is still leading in the crypto sector. It is ahead of competitors according to all parameters: capitalization is equal to 203 billion dollars and the 24 hours trading volume is about 13 billion dollars. In order to estimate liquidity, it is important to take into account at least two things: capitalization and market value.
We divide the trading volume per day by the value of the coin ($11 412) to determine the coin’s demand. We get 1.2 million Bitcoin: the turnover of BTC per day. You can use this data to compare it with other altcoins or to see how liquidity changed over the past few months.
Today we’ve learned:
- Liquidity affects the size of speculative profit while trading coins, and follows 4 main criteria to invest in the token or not.
- The amount of liquidity depends on the users’ interest.
- Interest consists of the volume of coins on the stock exchange, day trading, coin turnover in the market sectors of cryptocurrency economics.
- One way to calculate liquidity: the ratio of trading volume per day to the value of the token.