The cryptocurrency market may be during a bear run, but it isn’t stopping investors and enthusiasts from putting their money into the crypto space. The wild price swings present the opportunity of generating significant returns, although the risks are high as well.
Traders who only base their decisions on news articles are particularly at a disadvantage. To be a more successful Bitcoin trader, it’s important to understand the role of liquidity and volume in making educated trading decisions.
What is liquidity?
In its simplest sense, liquidity refers to how easy it is for an asset to be bought without influencing its price. In financial markets, the most liquid asset is fiat money while the least liquid is real estate. Going back to your economics class, you’ll remember that a situation in which the demand for an asset outpaces its supply, prices can dramatically increase. This is exactly what happens in the cryptocurrency market. In December 2017, everyone saw this in action when the demand for Bitcoin skyrocketed, causing its price to reach an all-time high of over $19,000.
Buyers need to be careful when facing the situation above. It may feel tempting to use a cryptocurrency trading robot such as Bitcoin Loophole to buy a lot of coins to take advantage of the price increase. But the price can go down just as quickly. It would also be difficult to purchase at or near the bidding price since the price might increase too fast that you’d have to end up placing higher bids to keep up.
A low supply, low demand situation creates a widespread market. This is where prices of cryptocurrencies can fluctuate wildly. It also explains why the most liquid cryptocurrencies are less susceptible to extreme price swings. For instance, seeing the price of Bitcoin rise or fall by over 30% overnight is rare, while less liquid coins can increase in value fivefold in the same period.
What is volume?
After knowing the importance of liquidity, you may have already picked out high-liquidity digital assets in the cryptocurrency market. You’ll notice that most of these coins have the highest daily trading volumes as well. By investing in these coins, you’ll have better control over your buying price, which means you’d be less susceptible to overpaying for the coins you’re interested in.
There’s a huge risk to investing in coins with low trading volumes. It’s possible that you believe in the future of a low-volume coin. If you decide to place a large order, you can’t expect for it to be filled with just one buyer. This means you might get some coins at your bid price, but your large order has caused asking prices to increase. You need to match the asking prices if you still want to acquire more coins.
With so many coins to choose from, it can be difficult to decide where to invest your money in the crypto space. But by understanding the importance of liquidity and volume, you can formulate more informed decisions and avoid pricing traps.