What is Liquidity?
Liquidity is the ability to take quick trading actions in the market with a price that indicates the current value of a security. Liquidity in finance is the rapid transformation of a security or instrument into a cash equivalent. Cash is seen as the most liquid asset because it is easily accessible and spent. For example; It is observed how easily a crypto money or stock can be converted into cash. If it is difficult to convert it into cash, this asset is considered an illiquid asset.
Liquidity Examples
Liquid Markets
Trading in liquid markets is very simple. Because the match situation is high at the point we call the buyer and seller order board. Forex, for example, is the world’s largest liquid market with a daily volume of close to $5 trillion. The daily volume in crypto coins is now over $ 300 billion on average, but with the volume increasing day by day, the footsteps in the financial markets have started to increase even more. Bitcoin is currently the most liquid asset in the cryptocurrency market. Because it is the currency with the highest trading volume and the most cryptocurrency whose exchange changes hands. Bitcoin holders are changing by thousands of people a day. The reason for this is that each individual has different market follow-ups, agenda follow-ups and willingness to turn them into cash.
Illiquid Markets
Illiquid assets are assets that individual investors and speculators do not favor much. Because the phenomenon we call the trading scissors is too much and it is difficult to convert it into cash. Examples of these are; Some forex pairs are stocks and cryptocurrencies that we have barely heard of.
Pros and Cons of Liquidity
If there is a volume of liquidity, investors can easily and quickly buy and sell. Investors can easily benefit from liquidity without being overly affected by the volatility of the asset. Liquidity markets are also known for their high rate of stability yield.
Liquidity has very little danger. What we call “liquidity risk” can increase risk appetite by a notch. If an asset is not liquid, depending on the supply and demand, prices show a lot of volatility, this situation annoys investors and prefers a more liquid asset. Therefore, the liquidity ratio in the asset decreases considerably, which creates a negative direction for investors who expect a long term.
The Liquidity Ratio Should Not Be Overlooked
The liquidity ratio seems to be a highly insignificant event by investors.We should prefer products with a high liquidity market to secure ourselves against events that we cannot foresee in the future. Example; Cryptocurrencies with liquidity such as Bitcoin, Ethereum. Otherwise, if the liquidity ratio of the asset we invest in by saving from our own life is too low, the inability to convert it into a cash asset, the problem of finding buyers and sellers, excessive price volatility will lead you to a life in the vortex of anxiety and stress.