Liquidity refers to how easily an asset can be bought or sold without significantly moving its price. A highly liquid market — like Bitcoin or Ethereum on a major exchange — has enough buyers and sellers that large orders execute close to the current price. An illiquid market, common among small-cap altcoins, means even modest orders can cause sharp price swings, and exiting a position may require accepting a much worse price than expected.
How liquidity is measured: traders look at several signals together rather than any single number. Key concepts: Order book depth — the volume of buy and sell orders sitting at prices near the current market price; Trading volume — the total value traded over a period, a rough proxy for how active a market is; Bid-ask spread — the gap between the highest buy offer and lowest sell offer; tight spreads signal high liquidity, wide spreads signal low liquidity; Slippage — the difference between the expected price of a trade and the price actually received, which grows in illiquid markets. Liquidity can also evaporate suddenly during market stress, even for normally liquid assets, as market makers widen spreads or step back entirely.
Example: A trader wants to sell $50,000 of a low-cap altcoin. The order book only has $8,000 of buy orders near the current price, so the sale pushes through multiple lower price levels, and the trader receives an average price 12% below where the trade started — a direct cost of low liquidity.
Learn more: Investopedia — Liquidity Definition
