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According to new data posted by cryptocurrency analyst Willy Woo on Twitter, most cryptocurrency projects severely lack market liquidity, which keeps many serious investors away.
As the data quoted by Woo shows, only about 40 coins among the 4,978 coins listed on CoinMarketCap show any resemblance of decent liquidity on major exchanges. Market liquidity is important to investors as gaining significant paper returns may not be of consequence if they are unable to be realized, either because the coins are difficult to sell once their investors wish to lock in profits from successful trades, or because buying and selling a relatively large percentage of an illiquid coin’s total liquidity can create significant price movements, thereby erasing any would-be gains. As Woo eludes to, part of this is a self-fulfilling trait since investors want liquidity and many prefer to invest in coins that already have it firmly established, which only maintains the status quo of top liquid projects.
Coinmarketcap lists 4978 coins. Here's the top 50 by volume. Below the top 40 doesn't even register i.e. 4938 coins are illiquid.— Willy Woo (@woonomic) November 13, 2019
Investors want liquidity at entry and liquidity on exit. Very few coins have credible liquidity to be good investments. pic.twitter.com/3kXgn3NWjV
Both main cryptocurrency user types benefit from higher market liquidity
Cryptocurrency projects tend to attract two main groups: users and investors. Users seek to utilize the technology underlying the project regardless of the coin’s price, for example finding a payment and currency alternative to fiat currency and debit/credit cards or running decentralized applications. Investors, on the other hand, seek out new asset classes to generate returns on initial investment. These two classes have an interesting symbiotic relationship since the attributes to satisfy one group are often necessary for and benefit the other group. For example, investors need market liquidity to realize their profits from trades and to prevent large orders from causing significant price movements, and consumers need liquidity for easy access to cryptocurrency, as well as price stability.
Despite this need for market liquidity, however, the new Liquidity metric from CoinMarketCap shows that major exchanges just have a few tens of millions USD in liquidity. This is pretty stark when compared against the paper market cap of all cryptocurrencies at nearly 225 billion USD. This discrepancy draws attention to the need for cryptocurrencies to actually provide usable and realizable value and this will thus affect future market price.
Dash has mixed results with liquidity
Dash’s unique setup includes factors that can both harm and help the coin’s market liquidity. Because Dash extensively uses Masternodes, which require proof of ownership of 1,000 Dash each, much of the circulating Dash is not on exchanges, but associated with masternodes in privately-held wallets, leading to a relatively small percentage of the supply represented on exchanges. While this lower market liquidity could be beneficial to holders if buyers entering the market are more easily able to move the price upwards, it can also harm sellers because if they attempt to sell too much at once they may cause the price to significantly drop, potentially erasing gains, and buyers seeking to accumulate may drive the price up in doing so, lessening the amount they are able to acquire cheaply.
Nevertheless, Dash’s InstantSend instant settlement functionality may help mitigate this risk, as it enables those that hold Dash to quickly and cheaply move on and off exchanges. This allows cryptocurrency traders to both control their owns funds at all times while potentially gaining arbitrage profits and evening out the effects of low market liquidity by quickly capitalizing on price movements, stabilizing the market.