There are many factors that determine the price of a digital asset, and many that can cause it to change rapidly. Liquidity, by definition, refers to the ease with which an asset can be converted into ready cash without affecting its market price.

It is a very significant parameter of a crypto asset, which allows a trader or investor to know how quickly it can be realized at its market price. Fiat currencies, for example, are considered to be the most liquid, because goods and services can be purchased at any time and at the current market value. Tangible assets such as real estate, vehicles, and collectables, are all relatively illiquid by comparison.

Liquidity is extremely important in the cryptocurrency industry as it can determine how quickly assets can be traded at their current market value. This is paramount in a highly volatile trading environment such as digital asset markets where gains and losses can hinge on available liquidity.

For every seller of Bitcoin, for example, there must be someone prepared to buy it at that price. The more buyers and sellers injecting liquidity into markets, the better the chance of achieving that desired price.

In This Article:

Measuring Liquidity

Why Is Crypto Liquidity Important?

Lacking Liquidity

Factors Influencing Liquidity

Binance

Coinbase

Huobi Global

Other Crypto Liquidity Providers

Measuring Liquidity

There are two fundamental measures of liquidity.

    1. Market Liquidity
    2. Accounting Liquidity
  • This article will be dealing with the first measure as it has a direct impact on cryptocurrency markets. Market liquidity refers to the extent to which a market, cryptocurrencies in this case, allows coins or tokens to be bought and sold at stable, transparent prices. While accounting liquidity measures the ease with which individuals or companies can meet their financial obligations with the liquid assets available to them.
  • If a crypto exchange has a high volume of trade that is not dominated by selling, the price a buyer offers per share (the bid price) and the price the seller is willing to accept (the ask price) will be fairly close to each other. Traders and investors, in this case, will not have to give up unrealized gains for a quick sale.
  • When the difference, or spread, between the bid price and ask price grows, the market becomes more illiquid. Market liquidity for crypto assets largely depends on how many exchanges there are and the size of the market, which at the time of writing is around $270 billion (June 2020).
  • Daily volumes are indicative of the most liquid assets on the crypto market and Bitcoin is the clear leader with a daily volume of around $20 billion and a market share of around 65% at the time of writing. Tether also has massive liquidity as it is the standard stablecoin for crypto trading with just over the same daily volume as Bitcoin itself.
  • Cryptocurrencies with low liquidity and volumes are subject to volatile changes in price, and market manipulation. Unfortunately, many of the low cap altcoins fall into this bracket. At the time of writing, there were over 5,600 crypto tokens listed on analytics platform, coinmarketcap.com, and it has been estimated that 99% of them have virtually no liquidity. For an asset to be tradable it needs to have daily volume, one that does not move usually means that nobody is interested in buying or selling it.

Why is Crypto Liquidity Important?

Cryptocurrency liquidity is often considered a way to measure the popularity of tokens and coins on various exchanges as it can indicate transaction volumes. There have been problems with liquidity in crypto markets in previous years.

Just a few years ago there were very few places to buy and sell Bitcoin, and even fewer to cash out into fiat. The most popular exchange back then, and the one with most liquidity at the time, was Mt. Gox. By 2014, Mt. Gox was handling 70% of all Bitcoin transactions and its infrastructure was starting to feel the pressure. In February of that year, the exchange halted all trading after it was revealed that 744,408 BTC had been lost in an ongoing theft that had gone unnoticed for years.

The embattled exchange later filed for bankruptcy blaming hackers for the incursion and many of the subsequent lawsuits filed by customers wanting their money back are still pending. This had a massive impact on liquidity at the time as it was virtually depleted when the world’s dominant Bitcoin exchange went belly up.

Fast forward six years and the scene is totally different with hundreds of different crypto exchanges spanning the globe, all injecting more liquidity into markets. Investor confidence will increase when liquidity does, and inflows will follow resulting in increased prices and technological development for smaller projects. Before making an outlay, savvy traders will often evaluate the liquidity of a crypto asset to determine whether they are worth investing in. Those with higher liquidity will obviously be favored over those with little.

Lacking Liquidity

On the flip side, a lack of liquidity can result in some detrimental practices which could spell the death of a crypto token. Digital assets with low liquidity are poorly protected from speculation and market manipulation. Back in 2017, orchestrated pump and dump scams were common, and often initiated by a celebrity shill or social media whisper campaign.

Cryptos with smaller volumes can be easily manipulated by just a few players buying up a lot of tokens. This induces the price spike as the fear of missing out (FOMO) kicks in and the masses join the fray. The scammers cash out at the top, the price instantly dumps and the uninitiated are left grasping at digital dust as their profits evaporate. There were several examples of this pattern during the crypto boom of 2017 and many of those low liquidity tokens have either gone to the altcoin graveyard or are still inactive with nobody trading them.

In late 2019, on-chain analyst Willy Woo [@woonomic] took a look at liquidity across all of the tokens listed on the coinmarketcap.com website. At the time, only the top 40 out of 4,978 listed coins were considered liquid, meaning that the remaining 99% had no liquidity.

“Investors want liquidity at entry and liquidity on exit. Very few coins have credible liquidity to be good investments.”

By June 2020 the number of tokens listed had increased by 12.5% meaning that the number of illiquid altcoins has also increased.

Factors Influencing Liquidity

There are several factors that can have an influence on crypto liquidity.

1. Exchange Listings

Crypto exchange listings can be the make or break of a token. The more exchanges they are listed on, the easier they are to trade, and the higher the liquidity. Newly launched cryptocurrencies often have very low liquidity due to the fact that they have not been listed on any exchanges yet. The big players such as Coinbase or Binance can have such an effect on tokens and their liquidity that price often pumps and dumps when a listing is announced.

2. Adoption and Acceptance

The more places that accept certain digital assets, the higher their usage and liquidity will be. If people are actively using a coin to buy goods or services, the greater the turnover and the higher the liquidity. Crypto debit and credit cards can also help general usage and increase adoption. Bitcoin is at the top of this tree at the moment as the number of merchants and outlets that accept it has increased substantially since its inception. Ethereum is another good example as it is now used to power an entire decentralized finance industry that has grown faster than crypto markets themselves in 2020. Both assets have very high levels of liquidity.

3. Regulatory and Governmental Constraints

Government regulations can have a huge effect on liquidity, especially on a geographical level. If fiat onramps are restricted, as they are in India and China, for example, crypto assets will have less liquidity in those regions. Some nations, such as Japan and South Korea, have restricted the use of anonymous crypto assets such as Monero and Dash for fears of money laundering. This would have an impact on their liquidity on exchanges in those countries. Countries that have outright bans on crypto trading will see very little liquidity within their physical borders, but that does not necessarily mean that demand from citizens is not there, China is a good example of this scenario.

4. Media and Public Awareness

Before 2017, most people were not even aware that cryptocurrencies other than Bitcoin existed. A buying frenzy, and the resultant fear of missing out (FOMO), resulted in a massive surge in prices for Bitcoin, Ethereum and pretty much all other altcoins. This huge capital injection increased liquidity across the board and media hype just increased public awareness even further. Ethereum went from under $10 to over $800 that year as daily volume exploded to over $4 billion, which does wonders for liquidity.

5. Market Capitalization and Volume

Naturally, two of the largest factors with an influence on liquidity for digital currencies are market capitalization and daily volume. The volume levels a crypto asset has generally correlated to the number of people that are actively interested in buying and selling it. Market cap is also indicative of the popularity of a crypto coin and how much has already been invested into it.

Types of Crypto Liquidity Providers

There are various types of crypto brokers and liquidity providers. The Chicago Mercantile Exchange lists several liquidity providers that are targeted to institutional investors. Major funds such as Grayscale or Bakkt provide liquidity for futures products and crypto derivatives but are generally not suited to spot markets or casual traders.

For those that do not have those institutionally deep pockets, cryptocurrency exchanges provide the greatest liquidity and, ‘the bigger the better’ definitely applies to this situation. The larger exchanges have more users, which are related to higher cash flows, greater volumes, and more liquidity.

Best Crypto Liquidity Providers in 2020

Binance

Binance is one of the world’s top crypto exchanges with an estimated global user base in excess of 15 million. According to the firm’s 2019 year-in-review, it offers crypto trading or services in 180 countries. It stands to reason then that daily volumes on the exchange are some the highest in the world. According to Coinmarektcap.com, the current 24-hour volume for Binance is over $4 billion and it offers 450 different tokens, though not all are available in all locations.

Binance Pros Binance Cons
Security, SAFU (safe funds) Restricted options in the USA
Multiple geographical locations Fiat not supported on the primary exchange
High volume and liquidity ID requirements for large withdrawals
Advanced trading functionality
Low fees for the industry
Educational resources

Coinbase

Coinbase is one of the most popular crypto exchanges for trading directly with fiat. It was founded in 2012 and has become a stalwart of the industry. Coinbase is supported in over 100 countries with more than 30 million customers around the world. Finding accurate measures of daily volume and liquidity on Coinbase can be tricky but there have been reports that the company has huge vaults of cryptocurrency holdings so liquidity is unlikely to be an issue here.

Coinbase Pros Coinbase Cons
Easy-to-use interface High fees and commissions
Crypto token earning campaigns Lacking good customer support
Pro version for serious trading Limited altcoins listed
Many fiat deposit options Strict KYC requirements
Excellent security and track record


Huobi Global

According to analytics providers such as coinmarketcap.com, Huobi Global is the world’s second-largest crypto exchange, behind Binance, in terms of daily volumes and liquidity. Huobi is a Chinese exchange that was launched in 2013, it has grown to provide crypto trading services in over 130 countries. Huobi Global offers over 230 different crypto coins and moved to Singapore to avoid China’s crackdown on crypto trading in 2017.

Huobi Pros Huobi Cons
Wide range of crypto tokens Wash trading accusations
Competitive feeds and spreads Unregulated
Derivatives options available
Loose KYC requirements
High volume and liquidity
Good customer support

Other Crypto Liquidity Providers

These are among the largest bitcoin liquidity providers in 2020, though there are several more exchanges with a decent track record. These include OKEx, Kraken, Bitfinex, Bittrex, HitBTC, and BitMEX. All are well established and provide solid liquidity and multiple crypto pairs, some also offer derivatives trading and high leverage.

Liquidity is a key factor for successful crypto trading and a good liquidity broker is essential for fast transactions at market prices. Exchanges with the largest user bases and most tokens tend to have higher volumes, and this makes all the difference when considering liquidity for cryptocurrency trading.