Is there a correlation between liquidity and volatility?

[alastantiger]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

[franky1]

things like gold have set market rate which they control the international rate with things like "circuit breaks" to stop large price movements. they also select certain markets to sell gold for more controls

however bitcoin is truly an international market where there are many markets..

what you have to learn is that bitcoin mining in iceland is 10x cheaper than mining in japan/hawaii
so pacific ocean countries are willing to pay alot more market price because its below mining cost..
where as the northern atlantic/norweigen sea/siberian sea touching countries are mining and would rather sell

because the controls are not there to stifle free market. the price can vary alot when different countries have higher demands than others

take gold again. it might seem cheap to mine gold in africa. but the big quarrys are american/EU managed so the natives dont get to sell at a premium and push the price down to their cost rate. they instead just get paid low salary as employees. the americans/EU managers take it to us/eu and sell it for profit whilst keeping the markets inflated to not crash down to african true mining cost rate

[oktana]

I agree with the saying that the higher the liquidity, the higher the volatility. Bitcoin is only possible to undergo all the price change at the speed it is because it’s liquid, hence it’s easy to cash it out. But what if the liquidity was reduced to half or even quarter of what it is currently? I think because of that, the price shouldn’t see any significant changes compared to when the liquidity is normal. However, in as much as Bitcoin has good liquidity, the volatility doesn’t show as much as most other cryptocurrencies.

[CryptopreneurBrainboss]

However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

Quick question, does Bitcoin have more liquidity than the Forex market? I know your answer is No so why then do you think the more liquidity of an asset, the higher the volatility?. When there's more liquidity the market tends to be less volatile that's why the Forex market is less volatile than that of Bitcoin. Volatility comes from a market that can be easily manipulate like the crypto market (in this discussion, Bitcoin market). There are other factors that's making Bitcoin volatile which lack of regulation is one of them and that the assets is still a new one (having less traders as other market).

There are some amount of trade that if they're carried out on exchanges, the exchange won't have the liquidity to handle them and would cause a force maintenance for the exchange. Volatility of Bitcoin comes from the fact that Bitcoin is a free market so irrespective of the liquidity, the market will be volatile for that reasons but as more liquidity and institutional investors comes into the industry, the price would begin to be more stable than it usually is. When there's no liquidity that's why an asset can be manipulated and it becomes more volatile so don't think high liquidity equals to more volatility, it's the other way around.

[hugeblack]

What gives fluctuation in price is supply and demand and the rate of change between them. If the rate of change of supply to demand were constant, the price would be stable regardless of liquidity. If we take real estate as an example, it is considered one of the assets that is difficult to liquidate. However, severe fluctuation in its prices can occur. Just like gold, the market varies according to markets, but in the end, stable supply and demand, or the rate of change between them that is not abnormal, is what makes the price of gold somewhat stable, which is what makes real estate and Bitcoin fluctuate despite the difference in liquidity between them.

[franky1]

What gives fluctuation in price is supply and demand and the rate of change between them. If the rate of change of supply to demand were constant, the price would be stable regardless of liquidity. If we take real estate as an example, it is considered one of the assets that is difficult to liquidate. However, severe fluctuation in its prices can occur. Just like gold, the market varies according to markets, but in the end, stable supply and demand, or the rate of change between them that is not abnormal, is what makes the price of gold somewhat stable, which is what makes real estate and Bitcoin fluctuate despite the difference in liquidity between them.

i laugh at the highschool lessons you have been taught..
"supply/demand" is a meaningless expression unless you understand the context of such words

EG supply..
in 2012 there were only 11.5m btc in circulation.. in 2023 there are 19.5m..
more "supply" now yet prices are >6000x compared to 2012($6)

EG demand..
if bitcoin was only sold/mined/used in america, on american exchanges that only allowed americans to trade. the demand would fix the price to a smaller speculation range/window. it wouldnt matter if the exchange had reserves of 2m btc or 200k btc. the price would only pivot within a smaller slimmer range

[DeathAngel]

There is generally a correlation between liquidity and volatility in financial markets. When liquidity is high, meaning there are many buyers and sellers, it tends to dampen volatility as it’s easier to execute trades without significantly impacting prices. Low liquidity often leads to higher volatility as even small trades can have a larger impact on prices. Other things can also influence volatility like market sentiment, economic events & geopolitical factors.

[btc78]

dont they have an inverse relationship?

if there’s high volatility investors might feel hesitant to buy or sell often waiting for the perfect time to finally enter or exit the market hence the decrease in liquidity

[Dr.Bitcoin_Strange]

Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

From what I have seen so far, I think that's right because I have seen some coins and tokens whose trading volume (liquidity) was very low on the first exchange it was listed on (a swap DEX), but after the same token got listed on a tire 2 CEX, the liquidity grew and the token became very volatile. Another one was that I was tracking one newly listed coin on Binance some weeks ago, and when I saw the coin, it only had a $44 million dollar liquity and was trading around $0.02. Later the next day, I saw that for that same coin, the liquidity was $150+ million and it was trading around $0.58.

What I know is that Bitcoin or other cryptocurrency is a much more volatile asset than gold, real estate, and other businesses that you have mentioned. The crypto market is only and takes place at the same time by different calibers of people (whales are also involved), and demand is high, but since gold and real estate are done more traditionally, I feel it's very slow compared to the cryptocurrency market, and that's because crypto is more volatile and liquidity has an influence on the volatile nature.

[dimonstration]

Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

This is wrong analysis. The higher liquidity means the lower the volatility since the big sell and buy pressure can be absorbed by the available liquidity without resulting a huge price impact. DEX is the best example on this case since it decentralized, The higher the liquidity pool is the lower volatility happening on a certain token assuming that price action on CEX is excluded.

The reason why crypto is too volatile despite we have huge liquidity is because CEX manipulating the price with their automated market maker. It reacts to the price trend happening across all exchange and create an order accordingly.

[kentrolla]

Nope, liquidity is no where corelated to the volatility and you will find some shit coins within almost no liquidity but they are highly volatile. It's just that Bitcoin or any other crypto (not all) are easily traded internationally through the CEX & DEX, you are confusing between ease of availability with volatility. Volatility is the nature of crypto and it will continue to remain volatile and also easily accessible for trading or converting into cash/fiat compared to other investments like stocks as the later are controlled and has to go through a process but Bitcoin is free from these controls.

[Huppercase]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

It's very easy to explain volatility and liquidity using bitcoin. Sometimes, it's possible that the bitcoin market will experience low volatility but you will still get high liquidity but the liquidity is dependent on how large the quantity of the bitcoin you have in your possession. With 100, it will be very to easily converted all that into other currency like usdt or any other type of stable coins but if an institutional investors want to convert there bitcoin into cash, it will be very difficult. Just like Microstrategy btc, even if the bitcoin volatility are high, it's impossible for such bitcoin to be liquid in a single transaction because the market is still young.

However, the market is better and more liquid of bitcoin to other altcoins, there are some altcoins even with high volatility, you will get nothing but zero value, if you even attempt to liquidate assets from such altcoins, the project will die immediately with -99% without a second thought. This is one of the challenges of investing in altcoins, they don't have much liquidity to handle sells pressure.

[Natsuu]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

Not necessarily. I think they are two different concepts in crypto and finance but you can understand both if them side by side.Basically liquidity is how easy you can turn it into cash and that doesn't automatically mean it's a rollercoaster in value or volatile. Take Bitcoin that is super easy to sell that makes it liquid but it can be all over the place in terms of price then volatile.

[davis196]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

The volatility depends on both the market liquidity and the supply. Yes, more liquidity leads to higher volatility, but only if the asset is scarce and the supply of that asset is limited. If Bitcoin was abundant on the markets(which is the opposite of scarce) the BTC volatility would be way lower, even though there's enough market liquidity.
There's an army of BTC HODLers, who help in keeping the BTC price high(because they don't sell their BTC). The Bitcoin price would collapse, if they decide to mass sell everything they have. I can't agree that Bitcoin market liquidity exists on the same level 24/7.
I think that the liquidity is closely connected to the market demand for BTC.
Sometimes, there's higher liquidity and there are periods when the market liquidity goes down.

[Casdinyard]

I think there is, the more supply, the more volatile the market is.

But in my opinion, the only essential factor that would really decide whether a crypto is "volatile" or not is whether it's designed to be that way, lapses on the coding, etc., or not. Take bitcoin for example. Its 21 million supply should in theory not induce some sort of volatility, I mean for crying out loud the amount's pretty low for a global currency in the first place, but Satoshi forgot, or perhaps deliberately made it so that bitcoin's allowed some form of volatility for profit. until it snowballed into this billion-dollar industry that we're now enjoying every single penny out of. Design is important cause no matter how much coins there is on your project, if it's not made for volatility/profit, it's never going to be volatile.

[Faisal2202]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

Nah, I won't say it because volatility can't be directly proportional to high liquidity, in some cases it might be but at most it is not. For example, BTC no doubt has high liquidity and high volatility but USD dollars or any other forex token also have high liquidity but they are not so volatile. I hope this will be of some help. If still not then try to think of it from another angle.

Which is, when BTC has high liquidity it means the trades can be made seamlessly without any stop, it means one can sell 100 BTC even if there are no 100 BTC buyers at the other hand due to the liquidity pools of exchanges. And when that happens the demand and supply ratio is disturbed. Like when 100 BTC is sold and the buying pressure is lower then there will be more supply than demand and we all know BTC prices make changes based on demand and supply as it is a decentralized coin.

Therefore, high liquidity might mean high volatility in terms of BTC but for stocks and forex, it might not be so true.

[el kaka22]

There is some, the lower liquidity means the higher possibility of volatility. I understand that it is not going to be easy for everyone but it is definitely an issue that will not be all that simple. Think about it this way, if there is very little amount being sold, then if you buy it all, then you will skyrocket the price, or if there is minimum amount being bought, then when you sell it all the price will go down.

So liquidity matters, doesn't mean the highest liquidity coin bitcoin is not volatile, it is also volatile there too, but at least it can't crash due to single whale, or at least it would have to be some huge whale, like those big corporations that have tens of thousands of bitcoins to end up sell all their coins at the same time to crash it, and publicly announce it as well. I think it is quite nice situation to have your money at the highest liquidity coin, it makes you realize that you are going to be fine daily, maybe longer term still requires attention, but not flash crash type of deals.

[Fortify]

As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

I once attended a conference, where some very clever ex-wall street traders explained a few different strategies and this was one topic that came up. Traders love volatility because they are able to make big profits from "betting" on how a certain stock will perform and if the market is quiet they do not earn as much. Crypto is very volatile when compared to the regular stock market, which would take a rare occurrence for it to double in the space of a year, but somewhat comparable if you compared individual cryptocurrencies against individual companies - there is always a growth story happening somewhere. However you need to be aware that companies in the stock market are actually producing tangible goods or services, which makes a profit, which gives their shares inherent value, which is not the same for crypto.

[franky1]

I once attended a conference, where some very clever ex-wall street traders explained a few different strategies and this was one topic that came up. Traders love volatility because they are able to make big profits from "betting" on how a certain stock will perform and if the market is quiet they do not earn as much. Crypto is very volatile when compared to the regular stock market, which would take a rare occurrence for it to double in the space of a year, but somewhat comparable if you compared individual cryptocurrencies against individual companies - there is always a growth story happening somewhere. However you need to be aware that companies in the stock market are actually producing tangible goods or services, which makes a profit, which gives their shares inherent value, which is not the same for crypto.

the inherent value of a company(based on produce and wholesale/manufactured cost vs sales). sets that value

however a "market valuation" is not based on the inherent value. a "market valuation" has many other things thrown at it to INFLATE it
listen to shows like sharktank when the investment seekers say "their revenue x3"

fiat shares valuation is a number where investors want to buy in at "x% undervalued" with the presumption that the share price they buy in at will reach the 'market valuation' in the 3x timescale

market valuation ---------------
                               /\/\   /\
      market price/\/\/      \/   \

....
however bitcoin also has value.. its a baseline everyone refuses to sell below because the cheapest place on planet to mine is x so no one wants to sell at a loss below X

bitcoins value sits below the market price

                       /\_/\     __
                      /       \/\/
market price/\/               ---
                         ---------
bitcoin value------


remember because fiat is inflationary and bitcoin is deflationary.. the way you view "valuations" is different
remember market valuations mean different things to a assets inherent value

remember bitcoin does have real world resources and costs backing it up(PoW). (however PoS crap coins dont)

i never "value" things based on 'market cap' or 'market valuation'

i prefer to value companies and assets differently

if i looked at a company and seen their wholesale to retail margin is 50%
i then take their sales and minus 50% to get to a figure of underlying cost. if the company was to get into trouble and needed to do a "price crash" sale of selling goods at cost. well that would be the baseline value. the liquidation amount

with bitcoin i dont look at market price of market cap. i look at cheapest mining on the planet to acquire bitcoin. and thats its value

[bayu7adi]

IMO, yes. Liquidity and volatility are connected, and I believe they can be divided into three categories in general view(my opinion).

# Low liquidity (i can say frozen) usually involves small transaction volumes, and asset owners may struggle to sell their assets due to a lack of interest from market and buyer. During periods of low liquidity, there are typically no significant price changes as investors are skeptical about its developments that still baby. This often occurs in the early stages when an asset enters unpopular exchanges (e.g in the crypto world).

# Medium liquidity involves a decent transaction volume but not a substantial one. Selling assets is relatively easy, but the moderate volume contributes to heightened volatility. I think this stage to have the highest volatility. This is usually a transitional phase where many significant investors begin to notice the asset. Some have already entered the market, while others are monitoring its movements.

# High liquidity (more liquid) , on the other hand, involves very high transaction volumes and people easy to convert their assets. Even large quantities of assets cannot significantly impact prices. Volatility decreases, and it takes longer for significant price changes to occur. This stage is characterized by stability and is reached when an asset has gained widespread recognition and acceptance.

Exactly, in my personal view, it's the medium liquidity level that makes an asset more volatile. This is because, at this stage, there is a decent transaction volume, making it relatively easy to sell assets. However, the moderate volume contributes to increased volatility, making price movements more erratic and unpredictable.