It was a sea of red in the crypto space over the past week as crypto traders have their accounts liquidated as Bitcoin and altcoins sell off.
According to reports, the total liquidations from traders amounted to a total of $403.42 million. This led to trends such as #cryptocrash on Twitter and other social media platforms.
Bitcoin, which lost almost $4000 in less than 12 hours also affected other cryptocurrencies. The market cap fell below $1.7 trillion to $1.64 trillion at some point.
The liquidity of assets such as Bitcoin plays a role in sudden price changes of cryptocurrency. The volatility in the price of cryptocurrency is also inevitable.
In this regard, we’ll discuss the meaning of Bitcoin liquidity and other important things to know about it. Before then, let’s know more about Bitcoin.
What is Bitcoin?
Bitcoin is a decentralized digital currency, without a central bank or single administrator. It can be sent from user to user on the p2p bitcoin network without the need for intermediaries.
The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The currency began use in 2009 when its implementation was released as open-source software.
As of today, Bitcoin is the largest and most popular cryptocurrency. Several other coins have been created using its model and are known as altcoins i.e. alternative currency.
As at the time of this writing, the price of Bitcoin is $34,191.24 USD with a 24-hour trading volume of $37,042,278,074 USD. It has a live market cap of $628,915,178,200 USD. It has a circulating supply of 19,035,025 BTC coins and a maximum supply of 21,000,000 BTC coins.
Why Do People Trade Bitcoin?
Listed below are some of the reasons people want to trade i.e. buy or sell Bitcoin.
1. Distrust of the financial system– Bitcoin came to be after the global financial crisis of 2007/8. It was proffered as a solution to the reckless behavior of large financial institutions & the inability of government to regulate them.
The advantages digital currency have over the traditional forms of money makes it one to consider for the people, Money laundering, for example is less common than cash currency.
As there has been a huge sense of distrust of the financial system, Bitcoin, which is decentralized therefore look like what to try out.
2. Make quick money– Many people want to trade Bitcoin as it is seen as a way of making quick money. The unstable price of crypto assets have made many to study its market in order to make a fortune.
Many who bought Bitcoin in the early days became millionaire overnight. These stories of the early investors have captured people’s imaginations and make them look to BTC to get rich.
Although there has been bubble at some points for various reasons, people still key to the possibilities in crypto.
4. Decentralization of crypto– Many crypto assets are decentralized. This means that no company, government or organization has complete control over the currency. Some people really care about the decentralization which helps to send/receive money without the notice of banks & other financial institutions.
Although some governing banks like the Central Bank of Nigeria has banned activities involving crypto in financial institutions, peer-to-peer platforms which are decentralized has been an option. One of the best P2P platforms in Nigeria today is Prestmit.
What is Bitcoin Liquidity?
Liquidity is defined as the level of difficulty involved in converting to cash—or liquidating—an asset without impacting its market price. The concept of liquidity influence the price of Bitcoin as well as every other cryptocurrencies.
Liquidity is for every tradable assets which include cash, bitcoins and altcoins. Liquid markets are deeper and smoother, while an illiquid market can put traders in positions that are difficult to exit.
Bitcoin, despite its growth in the past few years have experienced illiquidity just as we have seen in recent week. Liquidity of asset such as Bitcoin may also depend on the exchange used for trading.
BTC & other cryptocurrencies except stablecoins have issues of price volatility. The liquidity problem is one of many factors that lead to sudden movements in the Bitcoin price.
Factors That Influence Bitcoin Liquidity
There are several factors that can have impact in the liquidity of assets such as Bitcoin. They are discussed below in no particular order.
The exchange used by an investor for trading have a huge influence on the crypto asset like Bitcoin. The more trusted exchanges that exist, the more markets there are for people to buy and sell Bitcoin. This means that the greater total volume of BTC being traded on the exchange, the more liquidity.
A lack of liquidity can lead to an increase in volatility if one or more large traders are trying to enter or exit large positions. Prices can move up or down rapidly if there is a limited supply of an asset on the order books.
When there is a large supply of an asset and many large orders, it takes a greater amount of capital to move the market. A spike in volatility can also lead to a drop in liquidity, as panic selling ensues and bid/ask spreads widen.
Increase in the acceptance of Bitcoin worldwide can lead to more liquidity. Although Bitcoin has significantly grown since 2021, it is yet to be fully adopted by many nations of the world.
Many retailers and businesses are accepting Bitcoin today compared to years ago yet more acceptance is needed. The more it is used as a medium of exchange, the more liquid it will be.
Many governments have regulations against the use of cryptocurrency while a few have adopted it including El Salvador which made BTC a legal tender.
A clear stand by authorities on issues like consumer protection and taxation could bring more people out into the open to trade Bitcoin, which would affect its liquidity.
The daily volume of Bitcoin was under $100 million per day in 2014, and sometimes it fell below $10 million. By early 2018, that number had grown to over $20 billion.
The greater the volume of an asset on an exchange, the more liquid it will become.
Bitcoin may have produce lucrative returns for investors/trader, price volatility is a problem many have encountered. The problem with its liquidity is one of many factors that lead to sudden movements in the Bitcoin price.
If Bitcoin’s liquidity can be improved, this will help to reduce the risks associated with it and therefore help other cryptos. This does not mean that investing in cryptocurrency is without risks, in fact, it is the most risky. If you must invest, put what you can afford to lose as you money can go either way (fortune/misfortune).