In the context of cryptocurrency and tokens, liquidity is the degree to which a virtual asset can be quickly bought or sold in the market without affecting the underlying price. Let’s discuss this in more tangible terms.
Historically, cash is regarded as the most liquid asset because it’s easiest to convert into something else. For example, you can take your birthday money and spend it on a new plasma screen television – or anything else that strikes your fancy.
By comparison, it would be much harder to convince Best Buy to accept your childhood baseball card collection as payment. In this instance, you might have to find a willing buyer for your Upper Deck treasures before you can purchase your new television. Card trading enthusiasts could be difficult to find on short notice, so your collection (while valuable) is not considered liquid.
Essentially, liquidity captures the breadth of agreed value and willingness to transact in a specific asset class.
Trading volume is the quantity of an asset exchanged during a specific period of time. Oftentimes, trading volume is expressed in 24-hour increments, though weekly and monthly measurements are also common.
For our purposes, trading volume captures the size of a cryptocurrency or token market.
The most popular assets, like Ether and bitcoin, are easy to enter or exit. This is because they have a high volume. According to CoinMarketCap, as of publication, Ether’s 24-hour trading volume is $1.37 billion while bitcoin’s is $1.34 billion.
For virtual assets, it’s important to look at more than dollar-denominated trading volume. When measured this way, the ostensible trading volume increases as the asset price itself rises. This obfuscates the actual quantity of coins or tokens changing hands. To find this number, simply divide the dollar-denominated 24-hour volume by the price of the virtual asset.
Total 24h Volume in Dollars / Price of Ethereum = 24h Trading Volume of Ethereum
$1,368,110,000 / $370.21 = 3,695,497.15 Ether
This means that almost 3.7 million Ether has changed hands over the last 24 hours. Clearly, there are many buyers and sellers in the market. It appears that Ether is a liquid market.
Knowing the price and quantity data about a virtual asset can help guide your decisions. For instance, while it’s exciting to speculate on obscure coins and tokens, their low trading volumes – and high volatility – could make it difficult to sell when desired.
Conducting some basic research can help you make informed decisions before you buy your next virtual asset.