What is Liquidity? - Crypto in Plain English - Episode 266 - by cryptohunt.it

What is Liquidity?

Welcome to the Cryptohunt Jam, where we spend one minute a day to explain crypto. In plain English. My name is Christian Byza, Co-Founder of Cryptohunt.it and I am your host of this daily show.

Today, we talk about something that is important even outside of the crypto space: Liquidity. It is so important, in fact, that every purchase and sale of anything you can think of are affected by it. But before we dive into why that matters for crypto, let's find out what liquidity actually means.

An asset, meaning something that can be bought and sold, is liquid if there are enough of it to trade freely.

Let's take a famous painting to explain this: The Mona Lisa. It is, you guessed it, not very liquid, because there is only the one. Imagine your job is to find out at what price it should be insured. You’ll realize quickly: Giving it a value is really, really hard.

One thing: You could look at price history. But she’s never been sold, so there is no history to take into account. Even hypothetically, someone would have to be willing to actually sell it, and someone to buy it. And still, agreeing on a price is completely arbitrary. So, what is it? One billion dollars, 100 million, 10 million? We will probably never find out.

So, you see, lack of liquidity can lead to price uncertainty. Luckily, the opposite is true with liquid assets. Let's say you walk into your favorite furniture store to buy one of those framed photographs. Millions were made and they sell for $9.99 there, and if you look at eBay, there are hundreds for sale for a similar price, depending on condition. The value fluctuates very little, because there are many. We call that an efficient market.

But Cryptohunt! Get to the point! What does that have to do with crypto? Well, a lot actually. There are a ton of cryptocurrencies, most of them relatively small. Even worse, the majority can't be traded on big exchanges - Coinbase, for example, only has around 150 of the over 10,000 we know about.

All this means: Smaller cryptocurrencies are hard to buy, and even harder to price correctly. And even if you wanted to buy them, there may not be enough sellers, leading to temporary spikes or drops in prices.

Think this is not a big problem? Well, next time you buy something at the peak of those wild ups and downs, you might remember today's topic: Liquidity.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.