Since the launch of Bitcoin in 2009, the cryptocurrency industry has grown significantly. Currently, there are more than 2,000 cryptocurrencies being traded on the market. The impact that blockchain technology has had on other industries cannot be overlooked, either. The continuing popularity of the cryptocurrency industry has attracted new investors, both individuals and institutions.

If you are getting into cryptocurrency trade, price liquidity, volatility, and trading volumes are the most basic terms that you will hear. This article will focus on helping you understand what each concept means and the dynamics of each.

1. Price liquidity

Price liquidity in the cryptocurrency industry refers to how quickly a coin can be converted into cash. Cash is used as a liquidity reference because it is the most stable asset that can be easily accessed for purchases and selling.

How is liquidity significant for the crypto industry?

It equates prices – markets that have high liquidity tend to have fairer prices. This is due to a large number of traders that are found in such a market.

It creates market stability – high liquidity levels ensure that there is stability by protecting the assets from large swings caused by large trades, also referred to as “whale activity” (a term used to refer to individuals who have vast amounts of money and use it to influence market prices).

It speeds up transactions – as stated above, liquid markets have more participants, which makes it easy for your order to get a match quickly.

2. Price volatility

Price volatility refers to the extent to which prices of a crypto asset can fluctuate over a given period. The cryptocurrency market is considered to be very volatile because most coins tend to fluctuate in price very aggressively.

Causes of price volatility

Low liquidity

The cryptocurrency market has only been around for a short period of time and is therefore considered to be in its infancy stage. Growing markets tend to have low liquidity, which makes them highly volatile. A low liquidity market is highly susceptible to price swings because a single significant transaction can move the market massively.

The cryptocurrency market is unregulated

It has proven difficult to regulate the cryptocurrency market because of its open-source systems and decentralized technology. Without regulation, there is room for market manipulation from individuals causing volatility.

Speculation

Speculation from investors and traders in the cryptocurrency market is what’s driving the cryptocurrency industry since there are no regulations. As there are no exact metrics or fundamentals that can be used to set the value of a given coin, traders use the speculation of future adoption and traction to evaluate a given asset. Such speculation creates market instability, which leads to volatility.

3. Trading volume in cryptocurrency

The volume of any given coin listed in market aggregators like CoinMarketCap refers to the amount of that coin that has been traded in a period of 24 hours. A currency’s volume is of great importance because it can help to predict the direction of the coin. A decrease in the price of an asset but with high volume indicates that the currency is approaching a bearish run.

It is important to understand that you can never be sure about the cryptocurrency market. You only have to apply good analysis skills to reduce the risks in the market.

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Author: Tokens Team
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