Everyone involved in the digital currency market knows that the first advantage of Bitcoin has led to a network effect. But what is the real advantage of network effects? We’ve seen Bitcoin’s relatively low price volatility in the past as an advantage, but liquidity and slippage are two other factors that deserve attention.
Liquidity is a measure of how easily someone can quickly buy and sell an asset without causing a major change in the price of that particular asset. If an asset can be promptly sold or exchanged for goods or services without much effect on the market price, it is considered a liquid asset. Traditional fiat currency (in the form of cash) is the perfect example of an extremely liquid asset, as it can be used to purchase goods and services directly. A home would be a good example of an illiquid property, as it can take months to find a buyer willing to pay for it.
Slippage is essentially a side effect of the lack of liquidity. It is the difference between the expected price of a transaction at current market rates and the price at which the transaction actually occurred. For example, someone might want to sell a particular cryptocurrency worth $1 million on an exchange, but if that individual wants to make a quick transaction, they may have to sell a portion of themselves. at a price below the market rate because there were simply not enough buyers available at the final transaction price.
Many cryptocurrencies are easy to transfer money around the world in seconds, but most of them are also extremely liquid. As the data from Cryptowatch in the chart above shows, Bitcoin is by far the most liquid cryptocurrency on the market.
ETH is the only non-stablecoin to hit 8 digits in the Liquid Bis metric. In terms of Liquid Bis $5 million worth of coins, those are LTC, XRP, EOS, and BCH. Liquid Bis is defined by Cryptowatch as the sum of all bid orders within 100 basis points of the best bid across all markets tracked by the platform. Liquid Asks is the same concept, applied to the other side of the order book. In other words, this data represents the volume of trade offers on the books in the range of 1% per cryptocurrency market price.
If you are speculating on the price of a crypto asset, then you need to make sure that the coin has enough liquidity for you to leave the market. The top 10 major crypto assets are all highly liquid, which means you can sell it without worrying about slippage.
The added difficulties involved in moving in and out of illiquid altcoins make them relatively difficult to use as a store of value. Does the property really hold value if you can’t move it somewhere else without slipping in value?
This is not a theoretical problem. Slippage effects appear in various crypto-related financial services. In 2017, Elizabeth Rossiello, CEO of BitPesa noted that she had to think very hard about integrating new cryptocurrencies into her company because of liquidity. BitPesa has been providing Bitcoin liquidity to individuals and institutions in Africa since 2013.
Slippage also appears directly in the fees associated with various crypto services. For example, crypto lending platform Nexo bases their loan-to-value ratio on the liquidity and price volatility associated with a particular asset. Users who deposit Bitcoin can get a loan of about 52.7% of their deposit, while Stellar Lumens (XLM) depositors can only borrow about 17% of the value of their deposit. On online finance platform Uphold, transaction fees for smaller altcoins, such as Token BAT or LINK, are almost double that of Bitcoin transactions.
Disclaimer: This information is provided as a personal blog, not general information or investment advice. We are not responsible for your investment decisions.
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