The concept of liquidity has many facets, each influencing Bitcoin's price. One way of defining liquidity is the ability of an asset to be converted to cash on demand. Another view is that the bid-ask spread determines liquidity, and an investment with a lower bid-ask spread has higher liquidity. Liquidity thus means that there aren't discounts or premiums attached to an asset during buying or selling, and it is easy to enter and exit the market.
The market usually becomes more competitive as more of an item is bought and sold. This increases trade volume, which is one of the better ways to gauge Bitcoin liquidity. Here are some of the factors that affect Bitcon's liquidity.
Key Takeaways
- Liquidity refers to the ability to quickly and cost-effectively convert assets into cash.
- While Bitcoin and other cryptocurrencies trade 24 hours a day around the globe, they are less liquid than other asset classes.
- Transacting in Bitcoin or exchanging it for cash can come with extra costs and/or time delays.
Bitcoin Liquidity
Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion in the first few months of 2024. For comparison, the average turnover in the forex market was about $7.5 trillion daily, according to the Bank for International Settlement's (BIS) Triennial Central Bank Survey in 2022. This is a significant amount of liquidity.
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Liquidity is essential for any tradable asset, including the cryptocurrency Bitcoin. Liquid markets are deeper and smoother, while an illiquid market can put traders in positions that are difficult to exit. The graph above depicts Bitcoin's daily trading volume for the first quarter of 2024.
The daily volume of Bitcoin was under $100 million per day in 2014, and sometimes it fell below $10 million. In December 2017, daily volume hit more than $2 billion but fell below $1 billion in January 2018. Since then, Bitcoin's volume has stayed below $1 billion, with excursions over that amount corresponding to significant events in the cryptocurrency space.
Let's take a look at the main factors that influence the liquidity of Bitcoin.
Exchanges
The increased number of trusted Bitcoin exchanges allowed more people to trade their coins. The increase in frequency and trading volume helps to enhance liquidity.
Acceptance
The increased acceptance of Bitcoin at brick-and-mortar stores, online shops, and other businesses can help boost its usability and reduce its volatility. The more it is used as a medium of exchange, the more liquid Bitcoin becomes. There was a growing trend in acceptance by retailers at one time, but high speculative demand ate into the supply available for commerce.
Then, the use of Bitcoin in retail transactions suffered from negative publicity related to crypto scams and the price crashes of 2017, 2020, 2021, and 2022. However, the future of cryptocurrencies as a medium of exchange looks brighter than it has since then, especially with increased institutional interest and new investing products.
ATMs & Payment Cards
The network of cryptocurrency ATMs has continued to grow fairly steadily even as prices fluctuated wildly. Bitcoin ATMs are important for wider acceptance because they also facilitate buying Bitcoins. Many people are uncomfortable with online exchange transactions, so these ATMs are a great resource. However, this purchase mode may be much more costly than online exchanges.
Crypto ATMs are known for their high fees, some of which charge up to 10% per transaction.
In addition to ATMs, debit and credit cards are increasingly important in cryptocurrency. These cards make it easier to carry out transactions and purchases. The launch of Bitcoin-to-cash payment cards and ATMs boosts the usability and acceptance of Bitcoin. They facilitate purchases and withdrawals at the market price and help to increase liquidity while maintaining security. That could mean more ways to earn Bitcoins.
Regulations
Regulations, directly and indirectly, have a crucial role to play. The stance of countries on Bitcoin is as different as the countries themselves. It is banned in a few, allowed in some, and disputed everywhere else. Authorities in many countries are observing the situation, and many are even working on the regulations.
Despite the ambiguity on this front, virtual currency use is growing, albeit slower than in the past. A clear stance by authorities on issues like consumer protection and taxation could interest more people in using Bitcoin, which would positively affect its liquidity.
Awareness
Many people may have heard the word “Bitcoin” but are unaware of what cryptocurrency is or how it works. Many prospective buyers, investors, and traders are among these people. Limited knowledge and lack of clear guidelines by authorities limited cryptocurrencies to enthusiasts during their first decade. As the cryptocurrency world expands, many more people will learn about it and try it out.
Does Bitcoin Have Liquidity?
Bitcoin does have liquidity, but it is much less than that of the currency trading market.
Is High Liquidity Good in Crypto?
Yes. The higher the daily volume, the more liquidity cryptocurrency has. This is because more crypto is available for trade or exchange, which makes it more convenient to use.
What Is the Highest Liquidity in Crypto?
Tether (USDT), a stablecoin pegged to the U.S. dollar, had the most 24-hour trading volume on March 17, 2024—$74.4 billion compared to Bitcoin's $58.4 billion. Its market cap was smaller than Bitcoin's, but it had more liquidity because there was more of it being traded.
The Bottom Line
If you view Bitcoin as an asset, it has produced lucrative returns for its early investors. However, it remains volatile and less liquid than other investments. The liquidity problem is one of many factors that lead to sudden movements in the Bitcoin price. Thus, improved liquidity can help reduce Bitcoin's risks.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
