Liquidity risks associated with cryptocurrency exchange services
How is cryptocurrency liquidity measured?
- Bid-Ask Spread
- Trading Volume
- Market Size
"Liquidity, unlike other trade analysis indicators, has no fixed value. As a result, calculating the exact liquidity of the exchange or market is difficult. However, there are other signs that can be used as proxies for liquidity in cryptocurrencies.
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Bid-Ask Spread
The gap between the highest bid (selling) price and the lowest ask (purchasing) price in the order book is known as the bid-ask spread. The narrower the spread, the more liquid a cryptocurrency is said to be.
If a market for a digital asset is illiquid, investors and speculators would expect to see a wider bid-ask spread, making it more expensive to transact in that digital asset.
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Trading Volume
Trading volumes are an important factor in determining liquidity in the cryptocurrency market. It refers to the total amount of digital assets exchanged on a cryptocurrency exchange over a given period.
The indicator impacts the market players’ direction and behavior. A higher trade value indicates more trading activity (buying and selling), implying greater liquidity and market efficiency. Lower trade volume means less activity and low liquidity.
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Market Size
At present, the size of the overall cryptocurrency market, including Bitcoin, is still quite small. For example, based on the historical high price that Bitcoin has achieved of around $68,000 USD each and roughly 19 million or so BTC mined, its total market capitalization is around $1.3 trillion, where market capitalization is calculated as the amount of an asset outstanding multiplied by the price of each one of that asset. Industry estimates for the total market capitalization of all cryptocurrencies in the second half of 2021 is just over $2.5 trillion USD."