Crypto traders have to get a handle on a fairly diverse number of concepts, including those related to the technology underpinning cryptocurrencies, crypto liquidity importance, the differences between different available coins, and the market forces that determine the relative value of each at any point in time. 

However, there is one specific concept that bears mastering early into your crypto journey, and that is market liquidity. This refers to how quickly and easily a cryptocurrency can be bought or sold without significantly impacting its price. 

A coin with a liquid market will invariably have a high volume of buyers and sellers, smoothening out transactions and keeping price fluctuations controlled. Conversely, “illiquid” markets have few traders. This slows down trade volumes and leaves these markets open to sharp price swings and higher transaction costs.

For conventional coins, the effects of market liquidity are broadly similar to those of other traded commodities and currencies. On the other hand, private cryptocurrencies like Monero (XMR) present unique liquidity dynamics. 

As a privacy-focused coin, Monero may not be available on all exchanges. However, counterintuitively, its market remains popular and very liquid due to its strong privacy features, particularly when stored in a secure Monero wallet. This situation underlines how demand and liquidity can vary depending on a crypto network’s specific features. 

In any case, the relative crypto liquidity importance of a given coin (or any other asset, for that matter) has a direct impact on both trading strategies and asset desirability. Let’s dive into how liquidity and its immediate implications can change your crypto holding (or, in crypto parlance, “HODLing”) strategy:

1) Better Liquidity Means Easier Buying and Selling

High liquidity in a cryptocurrency network allows you to buy or sell with ease. More network users will invariably lead to quicker transaction times, simply because there is a bigger pool of HODLers to interact with. If liquidity is low, you may experience delays since there may not be enough buyers or sellers at a given price.

Quick order execution is particularly beneficial in fast-rising or dipping crypto markets, as prices can change rapidly from moment to moment. Liquidity, therefore, gives you the agility you need to act quickly and benefit from new market information, reducing “slippage” or discrepancies between the expected price of a trade and the actual price executed.

2) More Liquidity Means Lower Transaction Costs

Liquid markets can be thought of as “self-correcting” as they typically have narrower bid-ask spreads. In any market, lower spreads translate into lower risks and, therefore, lower transaction costs. This can be desirable if you’re looking to maximize profits on larger transaction volumes.

3) Reduced Volatility and Trading Risks

Smaller price fluctuations insulate you from the risk of a significant loss from sudden price movements, as can often happen with coins that have low liquidity. When liquidity is high, large trades are less likely to create a noticeable impact on the market prices, minimizing the risk for all participants. 

Furthermore, better liquidity allows you to enter and exit positions quickly, which is essential for taking advantage of profitable opportunities. In contrast, illiquid markets make it far more challenging to exit a position at the desired price, which can erode potential gains or leave one stuck in a losing position.

4) Safer, More Accurate Market Analysis

Though you can never be too sure about what happens next in crypto trading, all other things being equal, high-liquidity markets are easier to predict than illiquid ones. This is largely thanks to higher trade volumes tending to reflect a higher degree of market consensus. In contrast, price signals in low liquidity markets can be easily misread—a fact that has made them prone to “pump and dump” schemes.

5) Better Protection Against Price Manipulation

Speaking of pump-and-dump schemes, it takes significantly more effort for bad actors to try such strategies in thriving, liquid markets. Illiquid markets are far more prone to price manipulation by “whales” or large holders who can sink the market with substantial trades. Knowing that, if you want to get your feet wet in crypto, liquid markets provide a much safer environment for new traders.

Basic Pointers for Monitoring Liquidity

• Check each of your coins’ trading volumes regularly. Platforms like CoinMarketCap display trading volume for each cryptocurrency, giving you a feel for their organic (as opposed to manipulated) trade volumes.
  
• Examine bid-ask spreads. A narrow spread between bidding and asking prices typically indicates a liquid market.
  
• Observe market depth charts. Market depth analysis can show the buy and sell orders at different price levels, giving insight into real liquidity levels. High depth on both buy and sell generally indicates a stable, liquid market.
  
• Track liquidity trends over time. Monitoring liquidity trends after each major market shift and over time helps you anticipate when a certain coin’s markets may become more or less liquid.

Start Trading with Confidence – Consider Private Coins Like Monero

Most of the market manipulation that has happened over the past few years has primarily targeted new traders who were naive to basic market principles. It takes time to build up your understanding of crypto liquidity importance, but focusing on liquidity early on should help you conserve your capital and manage your risks much more effectively. If you’re ready to start your crypto trading journey, consider well-established private coins like Monero for added anonymity and as an additional hedge against bad actors. With the help of nandbox App Builder, you can develop unique applications that can monitor and assess the market liquidity of your cryptocurrency in real time.