What is liquidity in crypto and why does low liquidity matter?

Liquidity in crypto means how easily you can buy or sell a coin quickly without pushing its price up or down. A liquid market has many buyers and sellers, tight price gaps and plenty of orders waiting. An illiquid one has few, so each trade can move the price. This guide covers market liquidity on exchanges. Pools of tokens that power decentralized exchanges are a separate topic, explained in our guide to liquidity pools.

What does liquidity mean in crypto?

Central bankers have long described market liquidity in two main ways. A Bank for International Settlements paper calls them tightness, the ability to match buyers and sellers at low cost, measured by bid-ask spreads, and depth, the ability to absorb large trades without moving prices much.

Crypto data firms use similar tools. Kaiko measures market depth as the total of buy and sell limit orders within a set distance of the mid-price, often 1%. It also tracks spreads, volume and slippage, the extra cost of filling a large order. You can see all of these on an exchange's order book.

What is considered low liquidity in crypto?

There is no official cut-off. Liquidity is relative to the size of your trade. A coin may handle small trades smoothly but struggle with a large one. Warning signs include wide spreads, thin order books, trading concentrated on one or two venues, and volume that looks large compared with the depth on offer.

Liquidity is also concentrated. Kaiko's 2023 report found the top eight exchanges held 91.7% of global market depth, and that most altcoin liquidity went to the largest few altcoins. A high market cap does not guarantee deep markets either, because market cap multiplies price by supply and says nothing about how many orders are waiting.

Reported volume can be misleading. In October 2024, US prosecutors charged firms accused of wash trading, fake buying and selling designed to make tokens look actively traded.

What happens if a crypto has low liquidity?

The main effect is price impact. Kaiko gave an example in which selling $100,000 of the WLD token on one Uniswap pool would have cost 6.3% in slippage. On thinner markets, the gap can be far larger, and our guide to slippage explains why.

Low liquidity also means prices can swing sharply on small orders, which makes manipulation easier. The BIS paper notes that liquidity tends to drop sharply in a crisis, just when many people want to sell. In practice, the price on a chart may not be a price you can actually get for a large amount.