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Bitcoin Liquidity: How Liquid is Bitcoin?

By Brian Nibley · June 04, 2021 · 5 minute read

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Bitcoin Liquidity: How Liquid is Bitcoin?

After mastering the answer to “what is Bitcoin,” investors might be interested in how liquid the asset class is.

Bitcoin can be considered a relatively liquid asset class at most times. There are a number of established, trusted exchanges on which traders can buy or sell Bitcoin. Daily trading volume often approaches $10 billion. Spreads between buy and sell orders are usually not too extreme, and there are generally enough orders available on most exchanges for the average trader not to suffer the effects of slippage.

Here is your simple guide to Bitcoin liquidity.

Recommended: What is Bitcoin and How Does It Work?

What is Liquidity?

Liquidity is defined as the level of difficulty involved in converting to cash—or liquidating—an asset without impacting its market price. The easier it is to liquidate something, and the less likely a market participant is to move the price by doing so, the more liquid an asset can be said to be.

Cash, for example, is the most liquid asset of all. Real estate is generally regarded as the least liquid asset class. Selling real estate can take months and involves lots of paperwork, fees, and commissions. Precious metals like gold and silver are also rather illiquid.

Recommended: What is Considered a Liquid Asset?

Is Bitcoin Liquid or Illiquid?

How liquid is Bitcoin? Compared to many other asset classes, Bitcoin can be considered very liquid most of the time.

“Most of the time” is an important qualifier because market conditions are always changing. On an average day, it can be said that Bitcoin has great liquidity. But during times of crisis and panic selling, or times of euphoria and panic buying, this may be less so. The same can be said of most any asset class.

The exchange an investor is trading Bitcoin on also matters. The more traders and higher volume of an exchange, the greater Bitcoin liquidity there will be.

Factors That Impact Bitcoin Liquidity

These are a few of the most important variables that can affect Bitcoin liquidity.

Volume

Volume simply refers to how much of an asset there is being traded in a given timeframe (e.g., daily volume). Greater volume tends to increase liquidity and dampen the effects of volatility, something we’ll explore in greater detail shortly.

Exchanges

Liquidity is a big part of how crypto exchanges work. The more trusted exchanges that exist, the more markets there are for people to buy and sell Bitcoin. This translates to greater total volume of Bitcoin being traded, which makes for more liquidity. In the early days of crypto, this was a major obstacle to the liquidity of Bitcoin.

Storage

One interesting factor affecting Bitcoin liquidity is how people store their digital assets. This is a factor that is unique to cryptocurrency and doesn’t have much relevance in most other financial markets.

Because Bitcoin is a scarce digital commodity of sorts, the way it is stored matters.

People who hold large amounts of Bitcoin tend to be fans of something called cold storage, which involves holding the private keys to a crypto wallet offline. This method is thought to make coins less vulnerable, as they typically cannot be accessed by hackers or thieves of any kind.

Of course, if coins are held offline, they are taken off the market and therefore reduce liquidity.

Some researchers who have studied this concept have concluded that as much of 78% of the total Bitcoin supply was illiquid as of December 2020. This also implies that many people who own Bitcoin plan on holding it for some length of time and are not looking for fast profits, indicating they believe in its use as a store of value.

Volatility

Liquidity and volatility can be closely related. A lack of liquidity can lead to an increase in volatility if one or more large traders are trying to enter or exit large positions. As traders purchase existing sell orders or sell into existing buy orders, prices can move up or down rapidly if there is a limited supply of an asset on the order books.

When there is a large supply of an asset and many large orders, it takes a greater amount of capital to move the market. At the same time, a spike in volatility can also lead to a drop in liquidity, as panic selling ensues and bid/ask spreads widen.

In general, higher liquidity tends to make for lower volatility overall. This is part of the reason why Bitcoin used to fall or rise by 30%, 50%, or even more in a single day. Such moves are less common now that Bitcoin has a market cap in excess of $1 trillion.

Can You Liquify Bitcoin?

Yes. There’s enough Bitcoin liquidity for holders to liquify their holdings when needed. Cryptocurrency markets trade 24 hours a day, 7 days a week.

In this respect, large market cap cryptocurrencies like Bitcoin and Ethereum are generally a very liquid asset class in that traders can enter or exit positions at any time (the same cannot be said of all the thousands of altcoins, which are less popular and may have little to no liquidity on many exchanges).

In traditional financial markets, such as the US equity markets, trades can normally only be executed during the hours of 9:30 AM to 4 PM EST Monday through Friday, excluding holidays. Some derivatives, like futures contracts, may have additional trading hours. But for the most part, stock trading can only happen during regular business hours of the time zone in which a stock exchange is located (like the New York Stock Exchange, for example).

As long as there are buy orders on the exchange of an investor’s choice, they can liquify Bitcoin immediately at any time by selling into those buy orders. Some exchanges, like Coinbase, simplify this process from the user’s perspective and simply allow users to enter a sell order for a specific amount, while the exchange handles the details on the backend.

Recommended: Bitcoin vs. Ethereum: Major Differences to Know

What is the Most Liquid Cryptocurrency?

Naming one crypto as the most liquid is an educated guess at best. But Tether (USDT), the 4th largest cryptocurrency by market cap, might be the most liquid cryptocurrency, with highly popular cryptocurrencies like Bitcoin and Ethereum being the next most liquid cryptos.

Tether is a stablecoin that has its value pegged to the US dollar at a 1:1 ratio. Traders use stablecoins like USDT for various reasons, such as to immediately lock in profits from other coins, or to transfer a stable amount of value between exchanges.

At the time of writing in early April 2021, the daily trading volume of Tether was over $39 billion, while that of Bitcoin was less than $10 billion, according to data gathered by Messari.

Bitcoin has the largest market cap of any cryptocurrency with a market cap of about $1.05 trillion (April 2021), which represents over 55% of the entire cryptocurrency market. But as noted earlier, much of this market cap is likely held in cold storage and is therefore illiquid. So, Bitcoin liquidity is not as high as it could be, since many investors have begun to see Bitcoin as a store of value.

The Takeaway

In terms of what to know before investing in crypto, Bitcoin liquidity certainly ranks high on the list. Bitcoin is a liquid asset overall. Anyone can liquidate a large sum of Bitcoin at any moment in time with minimal slippage on most exchanges.

Interested in investing in Bitcoin, or other cryptocurrencies? With SoFi Invest® members can trade popular cryptocurrency like Bitcoin, Litecoin, Ethereum, and more—all while managing their account from the convenient mobile app.

Find out how to get started with SoFi Invest today.

Photo credit: iStock/Olemedia


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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