Liquidity simply refers to the ability of an asset or investment to be easily turned into cash without having a major impact on the asset’s market price. In other words, a high-liquid commodity has a relatively stable market, with few fluctuations in prices. In stark contrast, a low-liquid commodity has a volatile market – as seen in cryptocurrency.
This is an important consideration for any tradable asset such as cryptocurrency. Bitcoin is the first and most traded digital currency all over the world and is often regarded as the most liquid digital currency. It is the digital Gold. The low liquidity of Bitcoin ensures that making profits as a trader requires proper skills and experience to understand the mechanism behind the formation of price.
Can Bitcoin be regarded as an unstable asset?
The value of Bitcoin has been changing constantly over the years. So, its volatility has already been established. However, there is more to this. In reality, volatility occurs in every market and every aspect of human dealings – whether in various financial markets, politics, or friendships. Volatility, to simply put, involves unpredictable changes in situations.
It is not an unusual fact that volatility is the opposite of stability. Volatility could have a becoming and scary appeal simultaneously. Traders are scared of volatility until a jump in the asset’s price builds their wealth and they enjoy it. Yet, there is a common mistake people often make. Some think that low liquidity results in high volatility. It is not entirely true. Actually, it has been proven that high volatility leads to low liquidity, and not the other way around.
Oftentimes, traders attempt to recompense for any risk an unstable asset may pose due to fluctuation in price by keeping it with the hope of a rate increase. Bitcoin is considered a high-risk asset because of its high volatility. It is, however, a unique asset that most potential investors are attracted to. For instance, Bitcoin, despite its volatility, is very popular in the UK and the right trading platform is available for enthusiasts who are dreaming of trading in the UK. Oftentimes, they jump into it without learning about how it works. There are good courses that can improve awareness and skills for trading Bitcoin.
What are the factors that affect the liquidity of Bitcoin?
There are many factors that influence Bitcoin’s liquidity. Some of these are explained as follows:
General acceptance
Oftentimes, the interest people find in a commodity is affected by their perception of it. When people find positive reviews on a product or service, they are attracted to it. On the other hand, a negative review will cast doubt in the mind of even the most willing enthusiast.
However, Bitcoin is unique due to its antifragility. It is resistant to any form of attack from the media or government regulations. Yet, these rules have created certain scenarios that have increased the volatility of Bitcoin, thereby reducing its liquidity. As a result, this is one of the factors that contribute to the instability in Bitcoin price.
Payment methods
The Bitcoin network has evolved over the years and the use of ATMs has contributed to its wide acceptance since they enhance Bitcoin transactions. Some are not comfortable with the use of online exchange platforms. So, these ATMs are a great option for them.
Furthermore, credit and debit cards have found recognition in the cryptocurrency world. They also facilitate the purchase of Bitcoin, thereby increasing its liquidity and maintaining security.
Trading platforms
The increase in the number of available trading platforms will improve traders’ chances of carrying out transactions. This will lead to an increase in the frequency and volume of trade being carried out which also enhances liquidity.
Most times, many people attempt to keep their Bitcoins. However, as more trading platforms improve their security, holders will be motivated to trade their Bitcoins.
Bottom Line
Trading volumes for Bitcoin have grown significantly since its inception, and are now in the tens of billions daily. It is most likely the liquidity of Bitcoin increases if its recognition increases.