Dealing with cryptocurrencies;The knowledge of liquidity

July 1, 2017

In the context of crypto currency 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. Essentially, liquidity captures the breadth of agreed value and willingness to transact in a specific asset class. 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.

The importance of crypto coins volume for liquidity

The concept of liquidity has many facets to it. One way of defining liquidity is the ability of an asset to be converted into cash readily on demand. Another way of looking at it is when any asset can be bought or sold at its fair price. Liquidity thus means that there aren’t discounts or premiums attached to it during buy or sell and it’s easy to enter and exit the asset. It is believed as more of an item is bought and sold, the chances of charging premiums or giving discounts lower and such an asset usually trades around ‘what it is worth’.

Liquidity is important for any tradable asset, which includes the math based currency Bitcoins as well. Liquid markets are deeper and smoother while illiquid market can put traders in a spot from where it’s hard to navigate the way out.

The main factors which influence the liquidity of the Bitcoins.

  • Exchanges

The increase in the number of trusted Bitcoin exchanges will provide opportunity to more people to trade their coins. The increase in frequency and volume of trading helps to enhance liquidity. There are people who are holding their Bitcoins, more opportunity in terms of secure exchanges can make many to trade their Bitcoins and add more buyers and sellers to the market place.

  • Acceptance

The increased acceptance of Bitcoins at brick and mortar stores, online shops, bookings, etc can help to increase its usability along with reducing its volatility as more will come into circulation. The more it is used as a medium of payment, the more liquid they become. There is already a growing trend in its usability at various stores, both online and offline. The increasing use will help to also realize a fair price for this asset.

  • ATMs & Payment Cards

The network of Bitcoin ATMs is fast increasing; recent ones (as of November 2014) have opened in Virginia, Pennsylvania, Oregon, and Massachusetts. The Bitcoin ATM’s are of great importance for the wider acceptance (both cause and effect) as they also facilitate buying of Bitcoins. There are many people who are not comfortable with an online exchange transaction; these ATMs are a great resource in such cases. However, this mode of making purchases is much more costly than online exchanges. In addition to ATMs, debit cards and credit cards have also started to hit the Bitcoin world, making it easier to carry out transactions and purchases.

  • Regulations

Regulations directly and indirectly have a very crucial role to play. The stance of countries on Bitcoins is as different as the countries themselves – it is banned in a few, allowed in some and in dispute everywhere else. Authorities in many countries are observing the situation and many are even working on the regulations. Despite the ambiguity on this front, the virtual currency is growing at a fast pace.

  • Awareness

Many people may have heard the word “Bitcoins” but are practically unaware of what a virtual currency is or how it works. Among these people can be many prospective buyers, investors, traders of these digital coins. Limited knowledge and lack of clear guidelines by authorities has limited it to enthusiasts till now. As the Bitcoin world is expanding, its popularity and acceptance is growing alongside, which will bring in many more to try it out.

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