how to check liquidity of a crypto: Guide to Cryptocurrency Liquidity: How to Measure Liquidity & Trade Well

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how to check liquidity of a crypto

It is vital for anyone to assess the liquidity of the markets they’re about to enter before making any investment decisions. Investing in an illiquid exchange or coin pair could increase your difficulty in trading the coin and also result in higher execution costs. Crypto liquidity is the ability for a crypto asset (like Bitcoin or Ethereum) to be easily traded for other tokens or converted into fiat currencies is often described as liquidity. In simpler terms, liquidity shows how quickly and easily an asset can be bought or sold.

how to check liquidity of a crypto

If we look at Bitcoin as an asset, it produced lucrative returns for early investors. The liquidity problem is one of many factors that lead to sudden movements in the Bitcoin price. The way forward for this currency is hard to predict, but its foothold is increasing with time.

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In the previous article, we’ve explained the importance of liquidity and the factors that affect it. This guide will be dedicated towards uncovering the different indicators that measure liquidity and how you can utilize them to trade effectively. If you go to any cryptocurrency exchange, you can see an order book that showcases all buy orders (created by buyers) and sell orders (created by sellers). The order book is a great indicator of liquidity since you can assess if the coin pair that you’re interested in is liquid or not.

Greater trading volume equates to more trading activity (selling and buying) and is therefore a liquid market. Additionally, a higher volume backing a market trend – either a decrease or increase in cryptocurrency prices – signifies higher market activity backing the overall trend. For example, a drop with considerable volume behind it might mean a coin is in for an extended bear run. If price movements are not backed by volume, this would however indicate that only a small number of people are backing the current price trend and therefore, it may be short-lived. In fact, spikes in prices when trading volume is low can be an indicator of price manipulation.

how to check liquidity of a crypto

A wider spread in an illiquid market makes it more expensive to trade since you have to pay a premium to buy or sell at a lower price. It is interesting to note that the biggest exchange – based on total cryptocurrency volume – is ranked 5th for the BCH/BTC coin pair. This goes to show that looking only at the liquidity of an exchange is insufficient; you have to ultimately look at the liquidity of the specific coin pair that you’re interested to trade on. Due to the infancy of cryptocurrencies and its technology, the market is still considered illiquid since it is not ready to absorb large orders without changing the value of the coins. Illiquid markets tends to be highly volatile since anyone with a larger order can easily disrupt – or worse, manipulate – cryptocurrency prices. Hence, it becomes important for investors and traders to properly understand how to determine the liquidity of a crypto asset to avoid being negatively affected by the costs of illiquidity.

If trading volume increases or is higher than in the past, the market might be experiencing liquidity. Teams tend to tell their communities of plans to liquidity lock their pools to prevent the founders from withdrawing it and leaving investors in the lurch. It is important because history has seen scam project teams draining the liquidity and running away. By locking the pool, the tokens in it can’t be moved or redeemed for a particular period. This guide to cryptocurrency liquidity takes a look at how to measure liquidity and trade well. Understanding indicators to analyze liquidity is vital in the cryptocurrency world.

Members should be aware that investment markets have inherent risks, and past performance does not assure future results. MTC has advertising relationships with some of the offers listed on this website. MTC does attempt to take a reasonable and good faith approach to maintaining objectivity towards providing referrals that are in the best interest of readers. For instance, if the 24-hour volume of Bitcoin’s market is USD $300 million, it means that the total value of Bitcoin transacted within a span of 24-hours and across all exchanges amount to USD $300 million. If you use a liquidity provider, a good one gives you competitive spreads, low commissions, and low swaps without losing value on either side of the trade. If you use an exchange, good liquidity is measured by how fast you can convert your crypto to cash.

Our investment strategy involves providing deep liquidity crypto market making to the projects we invest in. This approach allows us to ensure continuous and substantial liquidity in exchanges. By doing so, we aim to increase market efficiency and reduce price volatility.

Bid-ask spread is defined as the difference between the bid price and the ask price for a coin. Liquidity is essential for any tradable asset, including the cryptocurrency Bitcoin. Liquid markets are deeper and smoother, while an illiquid market can put traders in positions that are difficult to exit.


Compared to ETH’s trading volume of $1.8 billion, Terracoin (TRC) only has a volume of $2,761. TRC is extremely illiquid since there is a severe lack of trading activity. A single buy or sell order would significantly affect TRC’s prices, thus making it more vulnerable to worrying levels of volatility and manipulation. It is therefore wise to stay away from trading illiquid coins unless they have garnered a suitable trading mass. In the context of cryptocurrencies, liquidity can be broadly defined as the ability of a coin to be converted into cash or other coins easily without disrupting prices.

One way of defining liquidity is the ability of an asset to be converted to cash on demand. Another view is that the bid-ask spread determines liquidity, and an investment with a lower bid-ask spread has higher liquidity. Liquidity thus means that there aren’t discounts or premiums attached to an asset during buying or selling, and it is easy to enter and exit the market. The daily volume of Bitcoin was under $100 million per day in 2014, and sometimes it fell below $10 million. After the Bitcoin price crashed, volume often fell below $5 billion daily. However, Bitcoin’s daily volume routinely exceeded $20 billion by early 2020 and continues to hover there.

The MTC resource center aims to bridge the gap by featuring easy-to-understand guides that build up and break down the crypto ecosystem for many. The more interested users are in a project, the higher its liquidity tends to be. The two most used indicators to determine a crypto’s liquidity are volume and the Bid-Ask Spread. Then, the use of Bitcoin in retail transactions suffered from negative publicity related crypto scams and the price crashes of 2017, 2020, 2021, and 2022.

We’ve made a Liquidity Checker, which lets you check liquidity for any pair on any of the 25+ supported exchanges in one click. Liquidity refers to the degree to which a particular asset can be quickly bought or sold without affecting the general stability of its price. The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. As of the date this article was written, the author does not own cryptocurrency. Enroll in our Free Cryptocurrency Webinar now to learn everything you need to know about crypto investing.

  • This guide will be dedicated towards uncovering the different indicators that measure liquidity and how you can utilize them to trade effectively.
  • A similar example is when you try to buy fresh produce at your local markets; there is a higher tendency for you to shop at a bustling market with lots of sellers and buyers rather than a market with few market participants.
  • Understanding locking liquidity is vital for everyone who wants to invest in a token.
  • Fiat-accepting exchanges have lower liquidity due to more stringent regulations, rigid verification process and limited trading pairs.

This is because, in a low liquidity market, a buyer who buys many coins at once or a seller who sells many coins at once can cause large swings in the price of a coin. Conversely, illiquid cryptos with few buyers and sellers make it difficult for you to sell the coins at your preferred price. Volume refers to the number of coins traded in a single market during a given period of time. Volume  can indicate the direction and movements of the current market trend.

Drive organic growth for your tokens with Yellow Capital’s Crypto Market Making services.

All exchanges are ranked according to their volume, exchanges with greater volume equates to them being bigger in size. The goal is to trade on cryptocurrency exchanges that have a higher trading volume, due to the previously mentioned benefits of liquidity. BY looking at the table above, you can see that HitBTC has 761 markets as compared to the 380 markets offered by the largest exchange, Binance. Highlighted in red is the total volume of ETH and EOS traded on all exchanges.

how to check liquidity of a crypto

Part of crypto’s advantage is that it has automated market making, which enhances the ability to buy and sell crypto at a lower priceCrypto assets with high liquidity can be easily bought or sold close to their value. On the other hand, crypto assets trading on exchanges with low or poor liquidity cannot easily be bought or sold quickly, this can be taken advantage of in the case of a crypto arbitrage service. Currently, the biggest exchange in the cryptocurrency world is Binance, which has a trading volume of more than $1 billion in a 24-hour period. If you look at the trading volume of exchanges, you’d find that crypto-only exchanges have much higher volumes than fiat-accepting exchanges. Fiat-accepting exchanges have lower liquidity due to more stringent regulations, rigid verification process and limited trading pairs. This is used to gauge the liquidity of an exchange; an exchange with a higher liquidity is better to trade on since there are more market participants and trading activity in that exchange.

Cryptocurrency Liquidity: Liquidity in the Cryptocurrency Market

You can see that Bitcoin trading has fluctuated drastically since its introduction. A greater trading volume for the coin pair means that there are lots of sellers and buyers that are interested to trade the coin pair. It is not recommended to trade obscure coin pairs which have limited popularity and trading volume can impair your investment positions. In any market, sellers would naturally want to sell at a high price to get more profits, while buyers would want to buy at a cheaper price.

This refers to the volume or the total number of coins traded–the volume of crypto is the total trading volume across all exchanges that offer the trade of that coin. A crypto’s trading volume is often measured in USD value, calculated over different timeframes. However, the twenty-four hour trading volume is often used to determine the liquidity of a crypto.The higher the USD value of crypto traded across all exchanges in twenty-four hours, the more liquidity the cryptocurrency has. Greater trading volume equates to more trading activity (selling and buying) and is a liquid market. Thus, looking at a crypto’s trading volume over a longer period or taking the average trading volume over a month presents a better representation of its liquidity. Liquidity has become one of the key indicators of the health of any crypto project.

ATMs & Payment Cards

But the future of cryptocurrencies as a medium of exchange looks brighter than it did a few years ago, especially with increased institutional interest. According to the Bank for International Settlements (BIS), the average turnover in the forex market was about $7.5 trillion daily as of April 2022. Buying and selling real estate often involves months of work, negotiations, filling out tedious forms, and paying substantial commissions.

There is an increasing presence of Bitcoin in the form of ATMs, exchanges, transactions in shops, casinos, and elsewhere. A clear stand by authorities on issues like consumer protection and taxation could bring more people out into the open to trade Bitcoin, which would affect its liquidity. Understanding locking liquidity is vital for everyone who wants to invest in a token. Liquidity is a pool of funds that allows people to buy and sell tokens immediately. Master The Crypto is a financial publisher that does not offer any personal financial advice or advocate the purchase or sale of any security or investment for any specific individual.

The most reliable crypto liquidity and price data

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

We help to stabilize prices and reduce the bid-ask spread, which can lower transaction costs for traders. This usually attracts more traders to the markets, by making it easier and less risky to trade your token which can help to increase the overall liquidity and trading volumes both for the benefit of traders and issuers. However, we recognize that providing liquidity also comes with potential risks, which we carefully evaluate and manage as part of our investment decision-making process.

You can see that ETH has a higher total daily volume at $1.8 billion compared to EOS, which has a volume of $697 million. Just looking at the absolute total trading daily volume, we can see that ETH has higher liquidity as compared to EOS. This makes trading ETH a better option, since it will be much easier and quicker to buy or sell ETH due to greater market activity. The increased number of trusted Bitcoin exchanges allowed more people to trade their coins. The increase in frequency and volume of trading helps to enhance liquidity. As popular exchanges become more secure, more of these holders are willing to trade their bitcoins, which adds buyers and sellers.

This means that if you were to buy a larger amount of BCH, you could affect the prices easily, thereby causing great volatility. Many people may have heard the word “Bitcoin” but are unaware of what cryptocurrency is or how it works. Limited knowledge and lack of clear guidelines by authorities limited cryptocurrencies to enthusiasts during their first decade. As the cryptocurrency world expands, many more people will learn about it and try it out. In addition to ATMs, debit and credit cards are increasingly important in cryptocurrency. The launch of Bitcoin-to-cash payment cards and ATMs boosts the usability and acceptance of Bitcoin.

This paper investigates the efficacy of low-frequency transactions-based liquidity measures to describe actual (high-frequency) liquidity. Both measures perform well during high and low return, volatility and volume periods. The Kyle and Obizhaeva (2016) estimator and the Amihud (2002) illiquidity ratio outperform when estimating liquidity levels. These two estimators also reliably identify liquidity differences between trading venues. Overall, the results suggest that there is not yet a universally bestmeasure but there are reasonably good low-frequency measures.

Mary Davis
My name is Mary Davis. I am successful broker. I want to share my experience with you through tutorials and webinars. For any questions of interest, please contact us by e-mail: [email protected]. +1 973-709-5130


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