1.7. Liquidity

Liquidity measures the ability of an asset to be frictionless converted without affecting the assets price, ideally allowing buying and selling of an asset with minimal price disturbance. Liquidity is highly correlated to volatility - lower liquidity usually results in more volatile markets, causing drastic price swings, whereas high liquidity creates a less volatile market, in which prices do not fluctuate as excessively.

Despite the fact that the cryptocurrency markets are trading with extremely high-volume levels, they are not nearly as liquid as we might think. This market is still highly fragmented in a web of exchanges under very different jurisdictions. The Liquidity is spread through various more or less trustworthy exchanges all over the world.

The emergence of more trustworthy regulated exchanges has boosted overall liquidity but has not yet delivered the desired effect of lowering spreads and slippage costs. Furthermore, increasing liquidity would definitely encourage significant institutional investments and promote mainstream adoption

Illustration 5: Monthly Volume Ranking (Currency) May 2018; Source: coinmarketcap.com