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How Liquidity Affects Bitcoin

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Liquidity is a multi-faceted concept in financial circles. Find out how liquidity can impact Bitcoin.

Liquidity refers to the ability of an asset to be converted to cash on demand. However, others also believe liquidity depends on the bid-ask spread. That assumption means an investment with a lower bid-ask spread will command higher liquidity. Therefore, liquidity stipulates no discounts or premiums are attached to an asset during its purchase or sale, enabling investors and traders to enter and exit trades quickly.

The market’s competitiveness heightens whenever investors buy and sell more of an asset. That diminishes the ability to charge premiums or issue discounts on purchases. Thus, that asset will certainly trade near the market value. Nevertheless, understanding liquidity and its impacts on Bitcoin is essential to every entity and individual seeking to invest in crypto.

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Forex Market Liquidity

The Bank for International Settlements estimates the forex market had an average turnover of about $6.6 trillion as of April 2019. Experts believe forex is the most liquid market, citing liquidity as an essential element of every tradeable asset. Liquid markets are more extensive and operate smoothly than illiquid markets that can easily place traders in compromising situations. Bitcoin has seen significant growth in trading volumes over the last five years.

Bitcoin’s daily trading volumes stood under $100 million in 2014 and sometimes dipped below $10 million. That number had grown to over $20 billion by early 2018. However, Bitcoin has also witnessed several episodes of illiquidity. Trading volumes often declined to under $5 billion daily after Bitcoin’s price crashed.

Bitcoin’s daily trading volumes suddenly twisted in early 2020, exceeding $20 billion. Those statistics indicate Bitcoin’s liquidity has been turbulent in the past, but things are getting better as several mainstream institutions, merchants, and individuals adopt it. However, cryptocurrencies such as Bitcoin are far less liquid than other asset classes mainly because exchanging the coins for cash can be subject to added costs and even time delays. So, what influences Bitcoin’s liquidity?

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Crypto Exchanges

Bitcoin’s success has seen the proliferation of thousands of crypto exchanges worldwide. The increase in crypto exchange platforms will create more opportunities for companies and individuals to trade Bitcoin. That would impact increased Bitcoin trading volumes and frequency, promoting liquidity.

Some people hold their coins outside of the exchange platforms for security reasons. That means they would be willing to trade their Bitcoins on the exchanges if the exchange venues boost security, increasing the numbers of buyers and sellers. The Crypto Genius is one of the reputable crypto exchanges to trade Bitcoin safely and seamlessly.

Bitcoin Acceptance

Bitcoin has experienced increasing acceptance into the global economy as several mainstream institutions, online stores, and brick-and-mortar stores adopt it into their payment systems. That helps to boost Bitcoin’s usability and reduce its volatility. Bitcoin becomes more liquid when more individuals and businesses increasingly use it as a medium of exchange.

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While Bitcoin’s acceptance among retailers was steadily growing in the past, the asset’s speculative demand has eaten into the available supply for commerce. Besides, Bitcoin’s price crash in 2017/2018 also impacted negative publicity on its retail transactions. Nevertheless, the increasing institutional interest in Bitcoin means it will continue to serve as a means of payment.

Regulations

Regulations also impact Bitcoin directly and indirectly. Countries have a significantly different stance on Bitcoin. Some governments have issued outright bans on crypto, others allow it, and a handful of countries remain uncertain. Several regulatory authorities are working on plans to regulate Bitcoin and other cryptocurrencies. And the main issues about consumer protection and taxation.

Bitcoin is an independent asset class that has generated lucrative returns for early investors. It remains subject to some critical issues, including volatility. However, liquidity is one factor that impacts sudden fluctuations in Bitcoin prices. Improving Bitcoin’s liquidity could solve some of its risks.

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