Liquidity risks associated with cryptocurrency exchange services

What is a liquidity crisis in crypto?

A liquidity crisis (or liquidity crunch) occurs when there is a lack of cash or "convertible to cash" assets. 

Why is liquidity so important in crypto?

"The ability to quickly and easily convert one unit of an asset into another is an important feature of any marketable asset, including cryptocurrencies. Low liquidity levels indicate market instability, which causes Bitcoin (BTC) price increases. In contrast, high liquidity implies a stable market with low price changes."

What is a crypto liquidity crisis?

"Platforms and exchanges need liquidity to run transactions (e.g., buying, selling and transferring). Many investors hold their assets on these exchanges since they offer different interest rates or high yields.

"A liquidity crisis arises in cryptocurrency when there is a lack of cash or “convertible to cash” assets. If you have cryptocurrency in the exchange, they must be able to finance your transactions, including depositing fiat, purchasing cryptocurrency, trading and withdrawing. However, if there is insufficient money or assets, such as Bitcoin to Tether (USDT) or Ether (ETH) to USDT, to support such transactions, it becomes a serious issue.

So, what happens during a liquidity crisis? In worst-case scenarios, a lack of liquidity signifies a looming bankruptcy. While no sure-fire red flags show a liquidity crunch is coming, investors should prepare for the worst. This could entail sacrificing the money you have on these exchanges as you will be unable to withdraw your assets."

Source: Cointelegraph