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In the article deep dive what is liquidity crypto? Discover how liquidity influences successful meme coin trading strategies.
There is no doubt that meme coins have exceeded expectations in the past six months or so. From BONK, HONK, BALD, and many others, meme coins are increasingly the core pillar of crypto and continue to pull crowds.
Looking at CoinMarketCap data alone, the sphere commands a whopping $57Bn, with the leading projects, mainly Dogecoin, Shiba Inu, and Pepe, worth billions.
Every day, billions worth of meme coins are traded via leading exchanges like Binance and decentralized platforms like Jupiter and Uniswap.
Though prices may have cooled off lately, it doesn’t mean interest has faded, at least looking at the humongous market cap projects like Pepe, Dogecoin, and Shiba Inu command. Nonetheless, not every meme coin is lucky, like BOME or PEPE.
If you are looking for the next BOME or BONK, there’s a crucial factor to consider: liquidity.
Liquidity measures how easy it is to swap an asset for another or fiat.
And, though most traders pay little attention to this, liquidity is one of the most important metrics every meme coin enthusiast should monitor. Aping in without paying close attention only exposes you to the wrecking ball.
Meme Coins Are Down But Not Out
While Bitcoin and Ethereum are down from all-time highs, their impact on meme coins has been profound. Top meme coins like FLOKI, PEPE, WIF, and the rest are far from their 2024 highs.
However, their liquidity remains unaffected. As such, even whales can buy millions or billions of tokens in one swipe without moving prices by large margins. This means that many traders ensure smooth transactions.
But, the question is, assuming you are a beginner and the meme coin in question has decent liquidity, how would you know a trade is “smooth”?
All you have to check is the following:
- Spread: The spread is the difference between the highest buy and the lowest sell price. If this difference is low, it means there are many traders on both sides, translating to lower trading costs and a stable market.
- Market depth: In simple terms, market depth can gauge how quickly your order fills. A “deeper” market means there are many buy and sell orders at multiple price points. Accordingly, your trades will be filled in quickly and efficiently. Most importantly, the asset’s market remains more stable even during high volatility.
- Price Across Multiple Exchanges: The price of your chosen meme coin should be traded at the same point across all exchanges. Avoid a token that trades at price A in one exchange and B in another. If prices are similar across all platforms, you can quickly react to market movements without worrying about being ripped off.
Why Liquidity Matters for Meme Coin Traders
High liquidity translates to faster trades, lower costs, and a smoother overall experience. If trades are smooth, more users will flock in, creating a virtuous cycle that benefits everyone.
Conversely, low liquidity can lead to:
- High execution risk since traders are hard to come by when you need them most.
- Trading at worse prices every time since you might be forced to sell for less than you paid, and vice versa.
- Combining the above, traders will be discouraged from participating since it is too expensive to place trades. Whenever traders choose to move capital to another meme coin, your choice asset will have low liquidity, possibly creating a vicious cycle.
The Bottom Line: Don’t Be Fooled by Hype – Dig Deeper
You have to be more prudent. Do not mindlessly chase the latest meme coin trend.
Instead, look for projects with solid liquidity. The more liquid a meme coin is, the healthier its market is. Subsequently, there is a greater chance of making profitable trades.
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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.
