How to analyze crypto market liquidity

Liquidity refers to how available (or in other words, how liquid) a coin is, and how that affects the ease and speed at which you can buy or sell it without causing significant changes to its price. A well established coin like Bitcoin has very high liquidity which is proven by the fact that you can trade large amounts of Bitcoin instantly without making major changes to its price. However, for newer and much smaller coins, their price might rise and fall quickly even with smaller trades.

Checking the liquidity of a certain coin before trading is important. Generally, higher liquidity makes trading the coin safer and more efficient, while low liquidity may increase risks, including risks associated with volatility (rapid price changes).

So, what are some indicators of liquidity?

• Trading volume: when a daily trading volume of a certain coin is high, this can mean that the coin is being actively traded. You can access any coin’s trading volume on Rain’s market page, and check its volume in the previous 24 hours to better understand its position. 

• Orderbook depth: similar to the above, checking the orderbook gives you a way to see the number of buy (bids) and sell (asks) orders on an exchange like Rain Pro. This can help you determine the depth of the orderbook by checking if there are enough buy and sell orders close to the coin’s current price. 

• Compare buy and sell prices: check the gap (known as spread) between the buy and sell prices. When the gap is small, this usually indicates better liquidity. On the contrary, if you notice a wide gap, this can suggest low liquidity.  

• Availability: there are at least 10,000 coins that are active globally. However, not all of them are listed on all exchanges. A coin that is available for trading on multiple big exchanges can mean that the coin has high liquidity. 

• Examine the impact of market sentiment: some coins can see a sudden (yet temporary) boost in their liquidity, and that usually happens with coins that are easily swayed by social media hype, world news, regulations, etc. Be careful and check if the coin holds its liquidity regardless of the condition of the market.

Keeping the above in mind, you can start to navigate the world of crypto trading with confidence. It’s also very important to trade on licensed and regulated platforms like Rain, which follows regulatory guidelines when it comes to coin listings. Rain has over 150 listed coins which you can trade through our Market page today.