Cryptocurrency liquidity calculation - tips

Cryptocurrency liquidity – this is an indicator of how easily and quickly you can purchase or sell a digital asset without loss in value. This criterion is very important for investors and traders. In this article, we will take a closer look at how to determine the liquidity of a cryptocurrency.

What is cryptocurrency liquidity and its indicators

Liquidity is the main indicator of the market. It is also important for crypto exchangers, since the exchange is carried out at the expense of their own liquidity. For example, the Mason-ex exchanger has a good stock, so the service has a good indicator.

Digital assets with high liquidity have a large trading volume and a small difference between the sale and purchase prices. The market situation can have a serious impact on changes in this indicator. But not only this criterion matters, there are several more factors:

• Trading volume. The higher this criterion, the greater the liquidity indicator. The trading volume for the previous day is taken into account.
• Market depth. This criterion shows the number of cryptocurrency transactions with different prices. If there are a lot of transactions, then liquidity will be high.
• Spread. The difference between the purchase and sale prices of a digital asset is directly related to the liquidity indicator. If the difference between prices is small, it means that many traders are willing to trade the asset at almost the same price, which has a positive effect on liquidity.
• Volatility. Sharp exchange rate fluctuations are a negative phenomenon. The higher the volatility, the lower the liquidity.

You need to pay attention to the general situation on the market. Stability and a calm news background contribute to ensuring a high liquidity ratio.

What is influenced by liquidity

The difference between the sale and purchase price – this is the main determining criterion. If liquidity is high, then it is good for traders and investors. But a low liquidity indicator indicates difficulties in the market, which negatively affects the execution of profitable transactions.

Traders pay attention to liquidity, since the ability to quickly open and close positions depends on this indicator. If the security of the cryptocurrency is high, then the investor can easily enter and exit positions, but at the same time not have a serious impact on the market.

For analytics, the collateral indicator is important, because the higher this criterion, the more stable the prices for cryptocurrencies. And low liquidity – this is high volatility and a jumping exchange rate.

Signs of low and high liquidity

Cryptocurrencies are divided into liquid and illiquid. But liquidity itself is relative. For example, you have $100 - there are no illiquid cryptocurrencies for you. But if you have millions in turnover, then the question arises: how to calculate this indicator? 

Liquid cryptocurrencies – These are those that are easy to convert into fiat or another cryptocurrency. However, the impact on price will be limited. Let's look at the example of Bitcoin – if a trader drops a position in one order per million, then this will not have much effect on the price of BTC.

Illiquid cryptocurrencies – It takes a certain period of time to exit a position, or there will be a price drop when placing one sell order. On charts this appears as a red candle with a large downward wick. As an example: all buy orders for a total amount less than $40,000 and just one sell order up to $40,000 will drop the value of a digital asset to 0.

This is how we come to ways to find out liquidity in cryptocurrency. The main criterion – this is the fullness of the order book and the small gap between the purchase and sale prices. Transactions with such cryptocurrencies should be carried out frequently. Low liquid cryptocurrency – This is the one whose stock book is empty, the gap between purchase and sale prices is large, and transactions are extremely rare.

How to calculate liquidity

There are 3 main indicators that you should pay attention to when calculating liquidity:

1. The digital asset is traded on many exchanges.
2. The stock order book is full.
3. And there are no frequent candles with disproportionate shadows on the chart.

And the logic in this is simple: exchanges will not list digital assets that have low trading volumes and are not interesting to traders. Naturally, this means the liquidity of the token. Worthless cryptocurrencies will not list on many major exchanges. But in the case when a digital asset is placed on one crypto exchange, it is very easy to create the illusion of high liquidity using bots.

Another important nuance that is worth paying attention to: frequent squeezes may reflect the presence of large traders who are getting rid of an asset, despite its value. This is not the best thing for a token.

Keep in mind that the liquidity indicator can be checked on the crypto exchanges where a particular coin is traded. But do not forget to carry out the technical analysis, be interested in tokenomics and learn the history of the creation of the coin.

Conclusion

To reduce the risk of losing funds, you need to approach the choice of cryptocurrency for investment responsibly. It is better to choose a digital asset with high liquidity. If you do not plan to invest large sums, then it is quite possible to take a closer look at assets with an average indicator. Such tokens have higher volatility, but the chances of making a profit in a short period of time are also greater. But low-liquidity assets – This is a high risk; in order to make money on them, you need to have experience, conduct situation analysis and technical analysis.