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Liquidity is a thing which allows you to sell your token or buy any token. And without any liquidity you can not even sell your token on CEX or DEX. But sadly most of us do not know about liquidity and how it works because often we trade top rated coins. Such as litecoin, bitcoin cash, ethereum, bitcoin. And in the case of this kind of coin, liquidity is high.
Anyway, crypto liquidity refers to the markets, it helps you buy or sell tokens and keep the token price in a limit. Do you know the words support and resistance? This is all about the liquidity of a coin. Often we hear that if Bitcoin is able to cross its $47k resistance then it will pump to 50k plus. Again we hear if bitcoin crosses the 44k limit it will go down more to 40k. This is all about liquidity of a coin and thus the coin keep volatile.
There are two kinds of liquidity : buy liquidity and sell liquidity. And this liquidity helps you to do the trading successfully and keep the price of the coin stable. Suppose, in Binance today only one BCH sell order available but there are a hundred buy order of BCH. So now if the seller wants to cancel the sell order then he can. While he increased the sell order price from $700 to $1700. Because there is no sell order on the market yet and he must not miss this chance to get a high price. On the other hand, the buyer has nothing to do but they need to buy BCH as they need this. Thus the price increased 2x plus due to less liquidity. And this will create problems in the market .
This is the reason why crypto liquidity is important in the market. Also you can face less buy liquidity though there is enough sell liquidity. But due to less buy liquidity, the coin is not selling while the seller keeps decreasing the coin value. Thus the coin value will decrease and create a problem in the market. So there is both an impact of less buy liquidity and less sell liquidity. Though this does not happen on top rated coins. Just look at this chart. You can see the bitcoin liquidity pool. There is a lot of buy or sell liquidity which ensures the safe and successful trading of every trader.
But look at the next picture now. Here you can see the talk token and btc trading pair. Where there is no talk token buy liquidity but there is sell liquidity. This makes the market down for the token and the token can not manage its value.
So this is how crypto liquidity works and without liquidity no trading will happen. Liquidity helps to up the market and helps to down the market too. Suppose I have one million bitcoins and I sent it on Binance and want to trade the whole bitcoin but in binance there is not enough liquidity to buy my one million bitcoin. So I sold all my bitcoin with low value and finished all the liquidity of the buy. Thus there will be no liquidity to buy and bitcoin price will go down. In the same way, the market rises when a buyer buy more bitcoin from somewhere than their liquidity limit.