How liquidity affects Bitcoin

Liquidity is a multifaceted concept in financial circles. Find out how liquidity can affect Bitcoin.

Liquidity refers to the ability of an asset to be converted into cash when needed. However, others also believe that liquidity depends on the bid spread. This assumption means that an investment with a lower bid spread will require higher liquidity. Therefore, liquidity stipulates that no discounts or premiums are attached to an asset during purchase or sale, which allows investors and traders to get in and out of trades quickly.

The market’s competitiveness increases every time investors buy and sell more of an asset. It reduces the possibility of charging premiums or giving discounts on purchases. Thus, that asset will certainly trade close to market value. Nevertheless, it is important to understand liquidity and its impact on Bitcoin for any entity and person wishing to invest in crypto.

Forex Market Liquidity

The Bank for International Settlements estimates that the foreign exchange market had an average turnover of around $ 6.6 trillion as of April 2019. Experts believe that currency is the most liquid market, and mention liquidity as an essential element in all tradable assets. Liquid markets are more extensive and work smoothly than illiquid markets that can easily place traders in compromising situations. Bitcoin has seen significant growth in trading volume over the past five years.

Bitcoin’s daily trading volume was below $ 100 million in 2014, and sometimes it fell below $ 10 million. This number had grown to over $ 20 billion in early 2018. However, Bitcoin has also witnessed several episodes of illiquidity. Trading volumes often fell below $ 5 billion daily after Bitcoin’s price crashed.

Bitcoin’s daily trading volumes suddenly turned around in early 2020, exceeding $ 20 billion. These statistics indicate that Bitcoin’s liquidity has been turbulent in the past, but things are getting better as more ordinary institutions, merchants and individuals use it. However, cryptocurrencies such as Bitcoin are far less liquid than other asset classes, mainly because exchanging coins for cash can be subject to additional costs and even time delays. So, what affects Bitcoin’s liquidity?

Crypt exchange

Bitcoin’s success has seen the spread of thousands of crypto exchanges around the world. The increase in cryptocurrency exchanges will create more opportunities for companies and individuals to trade Bitcoin. This will affect increased Bitcoin trading volumes and frequency, and promote liquidity.

Some people keep their coins outside the exchange platforms for security reasons. This means that they would be willing to trade their Bitcoins on the stock exchanges if the exchange sites increase security, increase the number of buyers and sellers. Crypto Genius is one of the reputable crypto exchanges for trading Bitcoin safely and seamlessly.

Bitcoin acceptance

Bitcoin has experienced increasing acceptance in the global economy as more regular institutions, online stores and physical stores take it into their payment systems. It helps increase Bitcoin usability and reduce volatility. Bitcoin becomes more liquid as more individuals and companies increasingly use it as a means of exchange.

While Bitcoin’s acceptance among traders has grown steadily in the past, the asset’s speculative demand has eaten into the available offer for trading. In addition, Bitcoin’s price crash in 2017/2018 also affected negative publicity on retail transactions. Nevertheless, the growing institutional interest in Bitcoin means that it will continue to serve as a means of payment.

Regulations

Regulations also affect Bitcoin directly and indirectly. Countries have a significantly different attitude to Bitcoin. Some governments have issued direct bans on crypto, others allow it, and a handful of countries remain insecure. Several regulators are working on plans to regulate Bitcoin and other cryptocurrencies. And the main issues of consumer protection and taxation.

Bitcoin is an independent asset class that has generated lucrative returns for early investors. It is still subject to some critical issues, including volatility. However, liquidity is a factor that influences sudden fluctuations in Bitcoin prices. Improving Bitcoin’s liquidity can solve some of the risks.