Liquidity

Liquidity pertains to the smoothness with which an asset can be traded without causing substantial price fluctuations and its ability to be readily converted into cash. The higher the ease of converting the asset into cash, the greater its liquidity. When discussing markets, liquidity refers to the extent of trading activity. Markets with higher trading volumes are considered more liquid. Examples of liquid markets include stocks, commodities, fiat currencies, and most large-cap cryptocurrencies. In contrast, markets with lower liquidity, such as fine art and real estate, involve fewer participants and may require more time or adjustments to the asset’s price for transactions to be successfully completed.