The liquidity of Bitcoin (2024)

The concept of liquidity has many facets, each of which influences the price of Bitcoin. One way to define liquidity is the ability of an asset to be converted into cash on demand. Another view is that the bid-ask spread determines liquidity, and that an investment with a lower bid-ask spread has higher liquidity. Liquidity therefore means that there are no discounts or premiums attached to an asset when buying or selling, and it is easy to enter and exit the market.

The market usually becomes more competitive as more goods are bought and sold. This increases trading volume, which is one of the better ways to measure Bitcoin liquidity. Here are some factors that influence Bitcoin's liquidity.

Bitcoin Liquidity

Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion in the first few months of 2024.By comparison, average foreign exchange market turnover was about $7.5 trillion per day, according to the Bank for International Settlements.BIS) Triennial survey of central banks in 2022.This is a significant amount of liquidity.

Liquidity is essential for any tradable asset, includingcryptocurrencyBitcoin. Liquid markets are deeper and smoother, while an illiquid market can put traders in positions that are difficult to exit. The chart above shows Bitcoin's daily trading volume for the first quarter of 2024.

Bitcoin's daily volume was below $100 million per day in 2014, sometimes dropping below $10 million. In December 2017, daily volume reached over $2 billion, but fell below $1 billion in January 2018. Since then, Bitcoin's volume has remained below $1 billion, with excursions above this amount corresponding to major events in the cryptocurrency space.

Let's take a look at the main factors that influence Bitcoin's liquidity.

Exchanges

The increased number of reliable Bitcoin exchanges allowed more people to trade their coins. The increase in frequency and trading volume helps increase liquidity.

To accept

The increased adoption of Bitcoin atstone and mortarstores, online stores and other businesses can help increase its usefulness and reduce its volatility. The more it is used as amedium of exchange, the more liquid Bitcoin becomes. There was at one point a growing trend in retail adoption, but high speculative demand negatively impacted retail supply.

Afterwards, the use of Bitcoin in retail transactions suffered from negative publicitycrypto scamsand the price decreases in 2017, 2020, 2021 and 2022.However, the future of cryptocurrencies as a medium of exchange looks brighter than it has since, especially with increased institutional interest andnew investment products.

ATMs and payment cards

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

In addition to ATMs, debit and credit cards are becoming increasingly important in cryptocurrency. These cards make it easier to complete transactions and purchases. The launch of Bitcoin-to-cash payment cards and ATMs increases the ease of use and acceptance of Bitcoin. They facilitate purchases and withdrawals at the market price and help increase liquidity while maintaining safety. It could mean moreways to earn Bitcoins.

Regulations

Regulation, direct and indirect, plays a crucial role. Countries' attitudes towards Bitcoin are as diverse as the countries themselves. It is banned in some countries, allowed in some countries and questioned everywhere. Authorities in many countries are monitoring the situation and many are even working on the rules.

Despite the lack of clarity on this front, the use of virtual currencies is growing, albeit more slowly than in the past. A clear position from the authorities on issues such as consumer protection and taxes could interest more people in using Bitcoin, which would positively impact its liquidity.

Attention

Many people may have heard the word “Bitcoin” but do not know what cryptocurrency ishow it works. Among these people are many potential buyers, investors and traders. Limited knowledge and a lack of clear guidelines from authorities limited cryptocurrencies to enthusiasts during their first decade. As the cryptocurrency world expands, many more people will do solearn more about it and try it.

In short

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

The comments, opinions and analyzes on Investopedia are online for informational purposes. Read ourwarranty and disclaimerFor more information. As of the date this article was written, the author does not own any cryptocurrency.