Liquidity refers to the ability of a coin to easily convert into cash or other coins in the context of crypto-currencies. Liquidity for any tradable assets, including cryptocurrencies, is important. A higher market liquidity is preferred, as it brings the following advantages:

BETTER AND FAIR PRICES FOR EVERYONE

In a liquid market, due to a large number of buyers and sellers, prices are far fairer for market participants. A robust marketplace with high trading activity , for example, ensures that sellers sell at competitive prices (so as not to lose out), while buyers bid at higher prices (according to their level of desperation), thus creating an equitable equilibrium market price for everyone. A stable equilibrium price is a sign of market stability and ensures that there are no disadvantages for market participants.

MARKET STABILITY

High liquidity ensures that prices are stable due to large trades, and will not be prone to major market swings. For example, in illiquid markets that have little market activity, it is very easy for ‘Whales’ (term for people with enormous amounts of money) to significantly affect prices or, worse, manipulate prices. A single order to buy or sell would create large swings in the prices of cryptocurrency, which contributes to increased volatility and risks for the general market. In a liquid market, given the presence of many market participants and their orders, prices are stable enough to withstand large orders.

QUICKER TRANSACTION TIMES

Buying or selling the cryptocurrency of your choice in a liquid market is much more convenient and easier since your purchase or sale orders would be filled much faster due to the greater number of market participants. You can enter or exit a trade instantly quickly, which is critical at times in the fast-paced crypto-currency markets.

INCREASED ACCURACY FOR TECHNICAL ANALYSIS

Technical analysis refers to the study of past prices and to the prediction of cryptocurrency prices using technical indicators and charting patterns. Although many disagree with the accuracy of the technical analysis, the methodology for understanding the general market and trading is still widely used. The formation of prices and charts in a liquid market is more developed and precise, thus improving its accuracy.