Liquidity of Bitcoin

What Is Bitcoin Liquidity?

Bitcoin liquidity is the ease with which the cryptocurrency can be bought or sold without affecting its price. If the market is highly liquid, it’s easy to make a purchase or sale. If the market has low liquidity (is illiquid), making a sale or purchase is difficult.

Factors that Affect Bitcoin Liquidity

While Bitcoin liquidity is very much a product of trading volume, circulating tokens, and active participants, there are several other factors that influence how easy it is to buy or sell the token. According to one study, the following also affect Bitcoin’s liquidity:

• Realized volatility: A measurement of changes in price over a period, theorized to be the most reliable variable for explaining Bitcoin liquidity because trading activity drives price changes
• Negative returns: Investor losses, which encourage sales over purchases
• Transaction fees: Network and trading platform fees, which cause investors to wait for low fee periods
• Number of transactions: How many transactions are occurring, not the fiat currency value of transaction volume
• Hash rates: Network hash generation speed
• Google search volume: Specific search terms like “Bitcoin” as a measure of public interest
• Term spread: The difference between interest rates on short-term and long-term government securities, often used to predict the business cycle
• Global financial stress: The financial stress felt in the markets at a given period

Liquid markets are deeper and smoother, while an illiquid market can put traders in positions that are difficult to exit. The graph above depicts Bitcoin’s daily trading volume for January through August 2024.

Bitcoin’s average 24-hour trading volume was $32.1 billion between January and August 2024. For comparison, the average turnover in the forex market was about $7.5 trillion daily, according to the Bank for International Settlement’s (BIS) Triennial Central Bank Survey in 2022 (the latest survey). These figures demonstrate the liquidity difference between the two—Bitcoin is much less liquid than the forex market.

Exchanges

The increased number of trusted Bitcoin exchanges has allowed more people to trade their coins. There are many more cryptocurrency exchanges globally than there are regulated forex and other exchanges, which helps to increase frequency and trading volume, further enhancing its liquidity.

Acceptance

The increasing acceptance of Bitcoin at brick-and-mortar stores, online shops, and other businesses in some developed countries and many more developing ones boosts the cryptocurrency’s usability and liquidity. The more it is used as a medium of exchange, the more liquid Bitcoin becomes.

However, the future of cryptocurrencies as a medium of exchange is still a coin toss, as they remain controversial and too complex for many users.

ATMs & Payment Cards

The network of cryptocurrency ATMs has continued to grow fairly steadily even as prices fluctuated wildly. Bitcoin ATMs are important for wider acceptance because they also facilitate buying Bitcoins. Many people are uncomfortable with online exchange transactions, so these ATMs are a great resource. However, this purchase mode may be much more costly than online exchanges.

In addition to ATMs, debit and credit cards are increasingly important in cryptocurrency. These cards make it easier to carry out transactions and purchases. The launch of Bitcoin-to-cash payment cards and ATMs boosts the usability and acceptance of Bitcoin. They facilitate purchases and withdrawals at the market price and help to increase liquidity while maintaining security. That could mean more ways to earn Bitcoins.

Regulations

Regulations, directly and indirectly, have a crucial role to play. The stance of countries on Bitcoin is as different as the countries themselves. It is banned in a few, allowed in some, and disputed everywhere else. Authorities in many countries are observing the situation, and many are even working on or have enacted regulations.

Despite the ambiguity on this front, virtual currency use is growing, albeit slower than in the past. A clear stance by authorities on issues like consumer protection and taxation could interest more people in using Bitcoin, which would positively affect its liquidity.

Awareness

Many people may have heard the word “Bitcoin” but are unaware of what cryptocurrency is or how it works. Many prospective buyers, investors, and traders are among these people. Limited knowledge and a lack of clear guidelines by authorities limited cryptocurrencies to enthusiasts during their first decade. As the cryptocurrency world expands, it’s likely many more people will learn about it and try it out.

The Bottom Line

If you view Bitcoin as an asset, it has produced lucrative returns for its early investors. However, it remains volatile and less liquid than other investments. The liquidity problem is one of many factors that lead to sudden movements in the Bitcoin price. Thus, improved liquidity can help reduce Bitcoin’s risks.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.