Most crypto traders only pay attention to the price movement of tokens. After all, the price is the most attractive metric that pulled investors' interest. However, skilled traders go beyond the price when they study the overall strength of an asset.
Trading volume and liquidity are very important data for every trader to know in order to judge the performance of an asset.
What is trading volume?
Trading volume is the total number of shares or contracts traded in a given period of time.
It is used to measure the activity of a token and the overall sentiment of a market. A high trading volume can signal high interest in a token. On the contrary, a low trading volume can mean a low interest in an asset.
If you are interested in trading a token, make sure to find out its trading volume record for the past few days or months.
Usually, newly launched tokens experience high trading volume because of the hype. That volume could eventually decrease when the hype fades away.
If the fundamentals behind the token sound right to investors, the trading volume should increase over time and stay consistent.
You can see the historical data for any listed crypto on Coinmarketcap or Coingecko. The historical data below shows Bitcoin with a steady average of $22 Billion in trading volume between January 28 to February 3.
What is liquidity?
Liquidity is a measure of how quickly an asset can converted into cash without significantly affecting its market price. It is an important concept in finance, as it affects the ease with which assets can bought and sold.
The liquidity of a token can also give a hint about the team behind the project. A project starting with low liquidity can be viewed as a project that fails to attract early investors. With some exceptions, most such projects don't have good business fundamentals. So, it is obvious that they couldn't raise enough funds to kickstart the project. I would stay away from these projects. Not 100% accurate with all projects, but just be cautious.
Liquidity scams
It's unfortunate that cryptocurrency had and continues to experience a high influx of scammers.
A new way of crypto scam is liquidity draining by the owner of the token. Usually, the token is launched with a high liquidity to fool naive investors. As more and more investors are buying, the initial liquidity easily increases with new cash.
You can check the initial and current liquidity of a project on Token Snifer. See the image below to see how liquidity can quickly from 1 ETH to 69EHT!
The owner or owners of the project can be tempted to take money out of the liquidity pool. They usually do this slowly so it doesn't catch anyone's attention. Many investors are then left with a token pair with no liquidity. Without liquidity, there is no way of selling your tokens, meaning you will be losing your money.
Fortunately, there are many tools that you use to find out more about the liquidity of a token. One of my go-to websites to screen token contracts is Tokensniffer.
Tokensniffer is free to use. You just have to copy and paste the token address in the search bar and press enter. Not only you will get information about the liquidity, but you will also get other valuable information like buy/sell tax, owner wallet holding, and more.
Below is information about the liquidity of a token called BIRD AI with token address: 0x4A3Aaa2596DFFAC245FB91d1D81ac6f79B630C2f . You can see that the token lacks adequate current and initial liquidity. 95% of that liquidity is locked for only 15 days. A very short locking period means the creator may have the intention to withdraw it soon. Just an example, not saying that will happen as I don't really know much about this project.
Here are other analysis websites you could use to screen tokens
