Liquidity Problems in Cryptocurrency
Cryptocurrency is digital money that exists on a decentralized, distributed ledger. As such, it is subject to the same liquidity problems as any other asset or currency. Liquidity refers to how easily an asset can be converted into cash or another liquid form of capital without significantly affecting its market value. In cryptocurrency markets, liquidity problems are especially important because of their unique characteristics and the lack of regulation involved in trading.
What Causes Low Liquidity?
Low liquidity in cryptocurrency markets can stem from several sources: low trading volume, limited market makers and large spreads between buy and sell orders (also known as “slippage”). Low trading volume means there aren’t enough buyers and sellers willing to purchase or sell different cryptocurrencies at any given time. Market makers provide liquidity by placing buy/sell orders for currencies with less demand than supply on exchanges like Coinbase Pro (formerly GDAX) or Kraken; however, they incur risk when doing so due to potential volatility in prices. Large spreads result from high demand for certain coins relative to others; this causes the price difference between buying and selling one coin versus another to be much larger than usual—making it difficult for traders who want access both kinds of coins quickly without paying too much extra cost per transaction.
How Can You Minimize Liquidity Risks?
The best way to reduce your risk associated with low liquidity is by diversifying your portfolio across multiple cryptocurrencies which trade on different exchanges with higher volumes. This will help spread out your exposure if one particular exchange experiences issues with low liquidity levels during a specific period of time. Additionally, you should pay attention to news about upcoming ICOs (initial coin offerings) since those tend to have more volatile pricing behavior due largely in part due to their newness compared against established cryptos like Bitcoin and Ethereum.. Finally, you may also want consider investing through regulated platforms where trades are matched internally instead of relying solely on public exchanges where order books are exposed directly—this reduces slippage caused by unpredictable price movements within the open market while still providing investors access necessary assets needed for efficient portfolio management practices..
