Cryptocurrencies: what aspect should we take, liquidity or capitalization?

By derwin25 | Worldinfo | 24 Sep 2019


Investing and marketing in the cryptocurrency financial market is not the same as doing it in traditional markets. While many concepts and techniques have moved from the stock market environment, acquiring knowledge about the peculiarities of cryptocurrencies is totally new.

When deciding on which cryptocurrencies to invest or trade, for example, it is more convenient to refer to liquidity than to the aforementioned, and commonly used, market capitalization.

Why is it better to analyze what aspects we should take into account when investing?

The shortcomings of market capitalization

Capitalization is a useful indicator in the traditional stock market and a global financial metric. However, in the case of cryptocurrencies it does not contribute in the same way in the understanding of the market and can even become deceptive.

This indicator refers to the total market value in dollars of the outstanding shares of a given company and is calculated by multiplying the outstanding shares by the current market price of a share. This figure helps determine the size of a company in the financial field.

In the cryptocurrency environment the indicator is very inconvenient, for some reasons:

  • It creates the wrong impression that billions of real dollars are in circulation within all initiatives related to crypto economics.
  • It increases market uncertainty when traders and investors observe large fluctuations in short periods of time, assuming that very large amounts of money enter and leave crypto projects in a matter of hours.
  • It does not provide a clear picture or perspective of what is happening in the cryptocurrency market or what are the most profitable projects in reality.

As a result of the custom in reviewing market capitalization before investing or marketing, the market tends to favor currencies or tokens with greater supply volume, which rise to the top positions with ease. This, neglecting other indicators such as price, the projects that are behind and the real behavior of your market.

Liquidity as a real meter in the crypto environment

Liquidity, as such, refers to the ability of a currency to easily become cash, allowing us to analyze how easily it can market assets.

In other words, the more liquidity a currency has, it can be bought and sold with greater agility without affecting the stability of its price. If, on the contrary, it is more complicated for a certain asset to be bought or sold, it will have less liquidity.

Commodity, stock or currency markets are, for example, much more liquid than art, real estate or antique markets.

The importance of liquidity in both cryptocurrencies and other markets lies in the transparency that it gives to market behavior. It also allows to know the conditions of the different markets and determine if they are favorable or not.

For example, a liquid market offers the following specific benefits:

  • Better prices: when there is more liquidity, there is also a greater number of participants and competition increases. Therefore, according to the laws of supply and demand, prices decrease.

  • Stability: markets with more liquidity are less vulnerable to manipulation. In an illiquid market, a single large-scale purchase-sale can influence prices extremely, causing them to be more volatile markets.
  • Agile transactions: a market with more participants and daily movement allows you to get in and out of it quickly, something very valuable in the environment of the cryptocurrencies that are just beginning.
  • Precision for technical analysis: in the most liquid markets the methodology of the technical analysis is more useful, which analyzes the previous prices of an asset together with other financial financial indicators, since the previous information is more developed and more precise.

The liquidity of the market, like any other indicator, reflects the situation of the asset according to certain conditions. That is, the liquidity level of cryptocurrencies is the result of different variables that favor or affect it, such as the volume of commercialization, the number of exchange houses that support that cryptocurrency, usability and adoption, and regulations in The different places of the world.

The cryptocurrency environment is very broad and complex, so it is important to stay in continuous learning and learn the context of each one before choosing them without further ado. Part of this process is to understand the type of measurements that are made in traditional financial and monetary environments and analyze the difference in application in cryptoeconomics.




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