Bitcoin's first-mover advantage has led to significant network effects. But what are the real-world benefits of these effects? While we have previously discussed Bitcoin's relatively low price volatility as one key advantage, liquidity and slippage are two other crucial factors worth examining.
Liquidity measures how quickly an asset can be bought or sold without causing a drastic change in its price. An asset is considered liquid if it can be easily exchanged for goods or services without substantially affecting the market price. Traditional fiat currency, in the form of cash, is a classic example of a highly liquid asset. In contrast, real estate is typically illiquid, as finding a buyer willing to pay market value can take months.
Slippage is often a direct result of low liquidity. It refers to the difference between the expected price of a trade and the actual price at which the trade is executed. For example, if a trader wants to sell $1 million worth of a cryptocurrency quickly, they might have to sell portions of it below the market rate due to a lack of sufficient buy orders at the latest price.
While many cryptocurrencies can be transferred globally within seconds, most suffer from poor liquidity. Bitcoin is, by far, the most liquid cryptocurrency in the market—especially when excluding Tether (USDT). Ethereum is the only non-stablecoin with liquidity in the eight-digit range after Bitcoin. Other cryptocurrencies with more than $5 million in liquid bids include Litecoin, XRP, EOS, and Bitcoin Cash.
Liquid bids, a metric introduced by Cryptowatch, refer to the sum of all buy orders within 100 basis points of the best bid on exchanges tracked by the platform. The same concept applies to liquid asks. This data helps traders understand the volume of orders available within a 1% range of the current market price.
If you are trading or considering investing in a particular crypto asset, it is essential to determine whether it has enough liquidity to allow you to exit your position smoothly. Most crypto assets suffer from low liquidity, making it challenging to buy or sell significant amounts without experiencing slippage.
This illiquidity makes it difficult for altcoins to serve as reliable stores of value. When you cannot easily exchange an asset without accepting a substantial spread, can you really be confident in the value you are holding?
This isn't just a theoretical concern. The impact of slippage is evident across various cryptocurrency-based financial services. Back in 2017, Elizabeth Rossiello, CEO of BitPesa, emphasized the practical challenges of integrating new cryptocurrencies into their platform. The company has been providing Bitcoin liquidity for individuals and institutions since 2003.
Rossiello stated: “If you can tell me that everyone is using this coin, that it’s super liquid, that there’s no slippage, and that you have brokers in six markets that can give me liquidity and maybe give me some credit or something—then I’m in business.”
Slippage also directly influences the fees associated with various crypto services. For instance, the crypto lending platform Nexo determines loan-to-value ratios based on an asset’s liquidity and volatility. Users depositing Bitcoin can borrow up to 52.7% of its value, while those depositing Stellar can only borrow 17%. On the online financial platform Uphold, trading less liquid altcoins like BAT or Chainlink incurs fees more than double those for Bitcoin.
These examples clearly illustrate the real-world advantages of Bitcoin’s network effect.
Understanding Liquidity and Market Depth
Liquidity is a foundational concept in both traditional and crypto markets. High liquidity means there are enough buyers and sellers in the market to allow large transactions without significantly affecting an asset’s price. Market depth, often visualized in order books, shows the volume of buy and sell orders at different price levels.
In the cryptocurrency world, Bitcoin consistently demonstrates the deepest market. Major exchanges like Binance, Coinbase, and OKX show order books with millions of dollars in orders just within 1% of the current price. This depth protects traders from sudden price changes when executing large orders.
Altcoins, especially those outside the top ten by market cap, usually have much thinner order books. A single large sell order can cause the price to drop considerably, leading to what traders call “slippage.” This makes investing in such assets riskier, particularly for those with large portfolios.
Why Slippage Matters for Traders and Investors
For active traders, slippage can significantly impact profitability. Day traders and arbitrageurs rely on small price differences to make gains. High slippage can erase those margins and even turn winning strategies into losing ones.
Long-term investors should also care about liquidity. The ability to enter or exit a position at a predictable price is crucial—especially during periods of market stress. In a downturn, illiquid assets can be particularly hard to sell, potentially leading to much larger losses than anticipated.
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How Exchanges and Services Account for Liquidity
Many crypto services adjust their offerings based on liquidity. Lending platforms, derivatives exchanges, and payment processors all factor in liquidity risk when designing their products. As a result, users holding less liquid assets may face:
- Lower borrowing limits against their holdings
- Higher trading and transaction fees
- Fewer available trading pairs
- Reduced leverage options
This institutional approach to liquidity reinforces Bitcoin’s dominance. As the most liquid crypto asset, it continues to receive preferential treatment across the ecosystem.
Frequently Asked Questions
What is slippage in cryptocurrency trading?
Slippage occurs when you execute a trade at a different price than expected. This usually happens in fast-moving or illiquid markets where there aren't enough orders at the desired price level. It's especially common with large orders in altcoin markets.
Why is Bitcoin more liquid than most altcoins?
Bitcoin has the longest history, largest market capitalization, and highest trading volumes. It is listed on every major exchange and is widely integrated into financial services, making it easier to buy and sell in large quantities without major price impacts.
Can an altcoin become as liquid as Bitcoin?
While possible, it is challenging. Liquidity requires widespread adoption, deep market maker support, and trust within the trading community. Even large altcoins like Ethereum have not yet matched Bitcoin’s level of market depth and liquidity.
How can I check the liquidity of a cryptocurrency?
You can review order book depth on exchanges, look at daily trading volume across platforms, and use metrics like the liquid bids and asks indicator. A large difference between buy and sell orders often indicates low liquidity.
Does low liquidity always mean higher risk?
Generally, yes. Low liquidity can lead to higher volatility, greater slippage, and more difficulty exiting positions. This is particularly important for investors with large amounts of capital or those trading in time-sensitive situations.
Are stablecoins considered liquid assets?
Major stablecoins like USDT and USDC are highly liquid, often with deep order books. They are frequently used as trading pairs and for liquidity provisioning, making them essential to the crypto trading ecosystem.