What is crypto liquidity and why it matters
April 04, 2025
Liquidity is one of the key indicators that determines the health of any financial market. For cryptocurrencies, which are often characterized by high volatility, liquidity is even more important. If an asset is illiquid, you won't be able to sell it without a significant price drop, even if your prediction was correct. Liquidity determines how quickly and at what cost a cryptocurrency can be bought or sold.
In February 2024, according to CoinMarketCap, only 20 out of over 10,000 cryptocurrencies had a daily trading volume exceeding $1 billion.
Explaining Crypto Liquidity in Simple Terms
In finance, liquidity refers to the ability of an asset to be quickly exchanged for cash or another asset without a significant loss in value.
Example: if you own 1 BTC, you can sell it almost instantly on any major exchange (Binance, Coinbase, Kraken) at market price — that’s a highly liquid asset. On the other hand, if you have a little-known token with a daily trading volume of $25,000, even selling $5,000 worth could crash the price — that’s low liquidity.
Liquidity is often confused with trading volume. In fact, volume is just the number of transactions over a period of time, whereas liquidity also includes order book depth, the spread between buy and sell prices, and the number of participants ready to transact instantly.
On exchanges, liquidity is reflected through the spread — the difference between the best bid and ask prices. For the BTC/USDT pair, this spread typically does not exceed 0.01%. In contrast, small altcoins may have spreads of 2–5% or even more.
Another important metric is market depth. If there are only a few thousand dollars worth of buy and sell orders in the order book, even a small trade can significantly move the price. On liquid markets like BTC or ETH, market depth of $100,000+ is common on the top order book levels.
Types of Liquidity
Liquidity in crypto is a multifaceted concept. To evaluate it properly, it’s important to understand several main types that affect different aspects of trading and investing.
Exchange (Market) Liquidity
This is the most obvious and essential type — the ability to buy or sell an asset on an exchange without significantly affecting its price.
Example: the daily trading volume of BTC/USDT exceeds $8 billion. This means a trader can execute a $100,000 order with minimal slippage — i.e., little difference between the expected and actual execution price.
The higher the trading volume and the deeper the order book — the better the market liquidity.
Asset Liquidity
This refers to a token’s ability to be easily exchanged for other assets or currencies — not necessarily on one exchange.
It depends on:
- The number of trading pairs (e.g., BTC is traded in thousands of pairs, while new tokens may only have 1–2);
- Availability on centralized (CEX) and decentralized (DEX) exchanges;
- Support from market makers.
Example: Tether (USDT) has high asset liquidity — it’s traded on nearly every exchange and used as a base currency in thousands of pairs. A new DeFi token without a CEX listing might have decent exchange liquidity in a specific pool, but low overall asset liquidity.
Protocol Liquidity (in DeFi)
In DeFi, liquidity is provided by users via liquidity pools on decentralized exchanges (DEX) such as Uniswap, Curve, or PancakeSwap.
How it works: users lock two cryptocurrencies in a smart contract (e.g., ETH and USDC) to form a pool. Other traders can swap assets via this pool, paying a fee distributed among liquidity providers (LPs).
Example: on Uniswap v3, the TVL (total value locked) for the ETH/USDC pair exceeds $200 million. This means there is enough liquidity to support large trades without significant price impact. In small pools with TVL < $50,000, large swaps may cause major slippage or even drain the pool entirely.
Why Liquidity Matters for Traders and Investors
1. Spread and Entry/Exit Cost
In highly liquid pairs like BTC/USDT or ETH/USD, the spread is minimal — 0.01–0.05%. That means you buy and sell at nearly the same price. But in illiquid assets, the spread may reach 2–10%, causing an instant loss even before the trade becomes profitable.
Example: buying a token with a 5% spread means it must grow by at least 5% just to break even.
2. Slippage Risk
On low-liquidity markets, large orders can shift the price between clicking “Buy” and the actual order execution.
Example: a trader tries to sell $10,000 worth of a rare token with $30,000 daily volume. During the trade, the price drops by 12%, and they receive only $8,800 instead of $10,000.
3. Inability to Exit
During crises — market crashes, FUD, or delistings — illiquid assets can get “stuck” in your wallet. You might not be able to sell them even at a discount.
Example: in 2022, during the Terra collapse, many LUNA holders couldn’t exit their positions — volume dried up and DEX liquidity vanished in hours.
4. Impact on Investment Strategies
Investors handling large capital prefer only liquid assets to avoid moving the market with their orders. That’s why most major funds stick to BTC, ETH, and sometimes 5–10 top-cap tokens.
What Affects Cryptocurrency Liquidity
1. Exchange Listings
The more exchanges (especially CEXs) list a cryptocurrency, the higher its potential liquidity. Listing on Binance, Coinbase, or Kraken instantly boosts trading volumes. For instance, after ARB was listed on Binance in March 2023, its 24h volume topped $1.5 billion in the first day.
2. Trading Volume and Market Participants
24-hour trading volume is a direct measure of market activity. But real liquidity matters more than inflated volume — e.g., artificially boosted by bots.
3. Project Trust
The more users hold and use a token, the better its liquidity. Open-source projects with transparent tokenomics and active communities tend to maintain more stable liquidity.
4. Regulatory Factors
In case of legal issues or investigations, liquidity can quickly vanish. For example, in June 2023, after the SEC charged Binance, many tokens were removed from U.S. platforms, and their USD-pair liquidity dropped 50–80%.
Conclusion
Liquidity is the foundation of safe, predictable trading. It determines how quickly you can buy or sell an asset without a major price impact. In crypto, where volatility and risk are higher, liquidity becomes critically important — especially for beginners.
How to apply liquidity in practice:
- Before buying a token, check 24h trading volume — ideally above $1 million.
- Analyze market depth and spread in your trading pair. The lower the spread, the better.
- Use liquidity as a filter when choosing assets — especially for short-term trades.
- On DEXs, check the TVL of a pool to assess whether it’s enough for your trade size.
- Avoid assets that suddenly lose liquidity — it could signal project or exchange issues.
- Don’t open large positions in illiquid tokens, even if the forecast is positive — you may not exit in time.
Mastering liquidity assessment helps reduce risks, avoid mistakes, and preserve your capital.