Explain me like i'm 5: Market Liquidity

[DimitrisLodirogas]

 

[gentlemand]

Liquidity = the ease at which you can turn an asset into cash.

A market with deep liquidity can absorb large buys or sells without moving much. A market with very little will fall apart at the first sign of one person's big move. Plenty of markets effectively have none.

It's all well and good having an impressive headline price for an alt, but when you look at an exchange and the buys waiting it might only take a sell of $100 worth to reduce the price by 50%. A liquid market will have enough buys to swallow that sell without budging.

[Wexnident]

Making a simple comparison, it is like how you can grab a Jenga block without disrupting the balance of literally everything else. Market liquidity in the definition is how you can or someone else, purchase or sell an asset without causing a disrupt or change in the asset's price. You can also take it as somehow similar to demand and supply where, if supply was quite limited but then all of a sudden, the supply suddenly skyrocketed, this could potentially ruin the market economy since supply has caught up to the demand in a quick pace.

One example I remembered was the glitch in TF2 (Team fortress 2) where crates give off the rarest type of virtual item in-game. This lead to skins that usually cost 6000$ to suddenly drop down to 10$ or something similar.

[gantez]

Also, liquidity is the floating cash that you are allowed to trade with. You are actually not allowed but what you have or that which your trading capacity can carry. Either it is leveraged on or your real capital referred to as such.

[wxa7115]

An easy way to understand the concept of liquidity is to think of the money in the market as a liquid and about your actions as a piece of sponge, if you want to sell your coins in the market then this is the equivalent of using your sponge to absorb part of the liquid, if the sponge is too big then you will absorb all the liquid and your sponge will not even get wet, but if there is a lot of liquid then your sponge will absorb as much liquid as possible and the amount of liquid will seem to remain the same.

If what you want to do is to buy some coins then this is the equivalent of squeezing every drop from your sponge and if it is too big then the amount of liquid will increase too much, but if the sponge is small then this is the equivalent of pouring a few drops in the ocean.

The explanation is a little bit ridiculous but I hope you get the point.

[tranduong123]

Liquidity = the ease at which you can turn an asset into cash.

I think your opinion still needs to add that, the market liquidity is the ability to quickly buy or sell goods on the market without being affected by the price factor. And the time to buy and sell groceries is usually short

[DimitrisLodirogas]

Liquidity = the ease at which you can turn an asset into cash.

A market with deep liquidity can absorb large buys or sells without moving much. A market with very little will fall apart at the first sign of one person's big move. Plenty of markets effectively have none.

It's all well and good having an impressive headline price for an alt, but when you look at an exchange and the buys waiting it might only take a sell of $100 worth to reduce the price by 50%. A liquid market will have enough buys to swallow that sell without budging.

Helped a lot. Thank you for the explanation. No wonder CMC+s main indicator won't be trade volume but liquidity.

[BaseFEX]

Liquidity = the ease at which you can turn an asset into cash.

A market with deep liquidity can absorb large buys or sells without moving much. A market with very little will fall apart at the first sign of one person's big move. Plenty of markets effectively have none.

It's all well and good having an impressive headline price for an alt, but when you look at an exchange and the buys waiting it might only take a sell of $100 worth to reduce the price by 50%. A liquid market will have enough buys to swallow that sell without budging.

Helped a lot. Thank you for the explanation. No wonder CMC+s main indicator won't be trade volume but liquidity.

Indeed, many used to hold the strong belief that trading volume is a good measure of liquidity. However, in recent years, more and more studies have shown that high trading volume does not necessarily imply high liquidity. This is true, especially from our perspective, since some exchanges have been known to directly or indirectly engage in a form of market manipulation called wash trading, in order to give unsuspecting traders the illusion of liquidity.

Generally speaking, liquidity is how easily an asset or security can be bought or sold in the market, and converted to cash. From the cryptocurrency exchange and its traders' perspective, there are three common measures on market liquidity:

• The most popular and crudest measure of liquidity is the bid-ask spread, which is also called width. A low or narrow bid-ask spread is said to be tight and tends to reflect a more liquid market on the exchange.
• The second measure is depth, which refers to the ability of the market to absorb the sale or exit of a position. If it takes a huge amount of capital to crash the cryptocurrency price in a top 5 market by a small percentage, the exchange is considered to have excellent liquidity.
• Finally, the last measure--resiliency refers to the market's ability to bounce back from temporarily incorrect prices. If an exchange often exhibit lasting bizarre market prices for major trading pairs, it is a very convincing indicator of poor liquidity.

[DimitrisLodirogas]

Liquidity = the ease at which you can turn an asset into cash.

A market with deep liquidity can absorb large buys or sells without moving much. A market with very little will fall apart at the first sign of one person's big move. Plenty of markets effectively have none.

It's all well and good having an impressive headline price for an alt, but when you look at an exchange and the buys waiting it might only take a sell of $100 worth to reduce the price by 50%. A liquid market will have enough buys to swallow that sell without budging.

Helped a lot. Thank you for the explanation. No wonder CMC+s main indicator won't be trade volume but liquidity.

Indeed, many used to hold the strong belief that trading volume is a good measure of liquidity. However, in recent years, more and more studies have shown that high trading volume does not necessarily imply high liquidity. This is true, especially from our perspective, since some exchanges have been known to directly or indirectly engage in a form of market manipulation called wash trading, in order to give unsuspecting traders the illusion of liquidity.

Generally speaking, liquidity is how easily an asset or security can be bought or sold in the market, and converted to cash. From the cryptocurrency exchange and its traders' perspective, there are three common measures on market liquidity:

• The most popular and crudest measure of liquidity is the bid-ask spread, which is also called width. A low or narrow bid-ask spread is said to be tight and tends to reflect a more liquid market on the exchange.
• The second measure is depth, which refers to the ability of the market to absorb the sale or exit of a position. If it takes a huge amount of capital to crash the cryptocurrency price in a top 5 market by a small percentage, the exchange is considered to have excellent liquidity.
• Finally, the last measure--resiliency refers to the market's ability to bounce back from temporarily incorrect prices. If an exchange often exhibit lasting bizarre market prices for major trading pairs, it is a very convincing indicator of poor liquidity.

Thank you for explaining thoroughly and clear. Like the CMC stated liquidity is a better indicator than trade volume. Good trading day!