Cryptocurrency is a digital currency that is secure through encryption. A decentralized, distributed ledger called the blockchain network is used to store and transact cryptocurrencies.
A crypto exchange is used to exchange cryptocurrencies or fiat currency to other cryptocurrencies and vice-versa.
Liquidity is the ability of a commodity to be converted to money, right on demand and with no difficulty. The concept remains the same for cryptocurrencies. The liquidity of a cryptocurrency is based on how easily the currency can be sold or bought for its exact worth.
High liquidity levels indicate a stable market where price variations are minimal. A low liquidity level represents a volatile market with large spikes in crypto-prices.
Exchange platforms for fast trade
Cryptocurrencies should be traded on strong and dependable crypto-exchanges. Liquidity will exist when digital currencies can be safely and easily converted to fiat currency and vice-versa. There are more than 50 crypto-exchanges existing today. Crypto exchanges can be used for crypto to crypto trading and crypto to fiat trading. The way to make money with cryptocurrencies is to exchange or trade them. Digital currencies are not yet widely accepted as forms of payment (though, an increasing number of vendors are beginning to accept cryptocurrencies as payment). Therefore, crypto exchanges help distribute the varied cryptocurrencies that exist today.
Capacity of cryptocurrency trade
The capacity and regularity of trade determine a cryptocurrency’s liquidity. The volume of digital currency traded on a platform increases and the frequency in which it is exchanged gives the currency high liquidity. If the exchange is capable of hosting a trade of varied and large amounts of currencies securely, the exchange has high liquidity.
Widespread acceptance of cryptocurrencies
The wider the acceptance of a cryptocurrency, the higher it’s liquidity. Cryptocurrencies entered the limelight as a means of payment in 2017, which resulted in a scramble to own the currencies with the highest value. Vendors like Amazon, eBay, PayPal, Home Depot, etc have begun accepting digital currencies. By mid-September of 2017, the acceptance of cryptocurrencies had increased by 800%!
Regulations may affect liquidity
Directly or indirectly, government regulations end up affecting crypto exchanges and liquidity. If an exchange platform is unable to receive support from banks to enable the fiat trading aspect of the platform, they will definitely face issues with supporting massive trade volumes. However, since cryptocurrencies are not controlled directly by a central government, crypto-trades will still exist.