What Is Liquidity and Why It Matters
Whether you can actually sell, at roughly the price you see. It determines more about an asset than its market capitalisation does.
What this covers
Liquidity is how much can be bought or sold without moving the price much. It is the difference between a price you can see and a price you can get.
The everyday version
A house has a listed price and it might take months to sell at it. A share in a large company can be sold in seconds at the quoted price.
Both have prices. Only one is liquid.
How to see it
The spread. The gap between the highest price a buyer will pay and the lowest a seller will accept. A narrow spread suggests an active market.
The depth. How much is available to buy or sell near the current price. This is the number that matters for anything beyond a small amount.
Most exchanges display the order book, which shows both. A narrow spread with very little depth behind it is a thin market wearing a disguise.
Why it matters to you
Your actual price depends on it. If you try to buy more than is available at the quoted price, you pay progressively more. That difference is called slippage and it is frequently larger than the trading fee.
Exiting requires a buyer. An asset you can buy easily and cannot sell is a common and unpleasant situation.
Prices in thin markets are not meaningful. A market capitalisation calculated from a price set by a few small trades does not describe what the whole supply could be sold for.
The warning signs of a thin market
Volume concentrated on one venue. If an asset trades mostly in one place, a problem there removes the market.
Wide spreads that widen further when prices move.
A large market capitalisation with small daily volume. The ratio between them is informative and rarely quoted.
What to do about it
Check depth before buying anything beyond the largest assets. Two minutes on the order book.
Prefer assets with meaningful depth across several regulated venues. Listings are published, and an asset available on multiple established platforms has a market that does not depend on any one of them.
Use limit orders in thin markets, so that you control the price rather than accepting whatever is available.
The simple version
Before buying anything, ask whether you could sell it tomorrow, and roughly at what price.
For the largest assets on established venues, such as a regulated exchange such as Collect & Exchange, the answer is yes at close to the quoted price. For most of the thousands of other tokens, the answer is considerably less comfortable, and the quoted price does not tell you that.