#Liquidity101 Understanding Liquidity in Finance
Liquidity is a fundamental pillar of financial markets. It measures how quickly an asset can be converted into cash without affecting its price.
đ 3 Key Dimensions of Liquidity:
1. Liquid asset: Easy to sell without loss â for example, stablecoins or BTC/ETH on a major exchange.
2. Liquid market: Many buy/sell orders with tight spreads â typical of major crypto pairs.
3. Liquidity of a company: Its ability to meet short-term debts â essential for DeFi protocols or CEX exchanges.
đ§ Why is it important?
Facilitates entry/exit of positions without major slippage
Reduces excessive volatility
Strengthens the stability of crypto ecosystems
đ Common indicators:
High trading volume = liquid market
Low spread (bid/ask) = better execution
Liquidity ratio (Quick/Current) for institutions
đĄ In crypto, liquidity is ROI: without it, even the best project can fail. Thatâs why liquidity pools, market makers, and yield farming play a crucial role in the ecosystem.
