Topic: Is there a correlation between liquidity and volatility? - page 2. (Read 493 times)

I'm not an expert on this but, no, I think your conclusion is wrong. By the way, and first off, Bitcoin isn't really very volatile, at least not consistently. There are times when it's moving sideway as if nothing happens in the market.

Anyway, I don't agree with your conclusion because volatility is normally attached to lack of liquidity. So, if there is any correlation, I think the correlation would be a negative one, not positive. Meaning, the lower the liquidity, the higher the volatility.

There's probably no universal formula for this, however. Gold, for example, is generally stable, although it could also be volatile in shorter time frames, but it's highly liquid. On the contrary, Bitcoin is also liquid but generally volatile. On the other hand, other cryptocurrencies that have low liquidity can be highly volatile. This is the reason why so many altcoins are delisted from exchanges, because of very low liquidity, which makes them prone to manipulation resulting to high volatility.

I do agree that liquidity matters a lot and low ones could cause a lot of issues without a doubt, volatility is nice when trading but sudden movements are not nice. I get that dropping %5 one day and then going up %3 the next day type of things are fine for trading, and should be important, but that doesn't mean that we are going to end up with a result like that easily, its going to be a trouble one way or another. Because the low ones could have %40+ drop one day and %200 increase another, that's not acceptable. So all I think is that volatility is good just a bit. Its like vaccines, you make the body sick just tiny bit enough to get it used to it so that when it gets sick for real it knows what to do and ready.

Of course there are other things that determines how volatile a cryptocurrency (Bitcoin) is, but I think liquidity still matters because, like I explained; if Bitcoin weren’t so liquid as it is, what do you think about the volatility? It’ll definitely be reduced because lower/no liquidity gives a more stable price and inability for price manipulation. But when it’s very liquid, people can easily make trades that then adjusts the price, and price manipulation wouldn’t be difficult as well.

I tend to disagree with this, I think it's the opposite Higher Liquidity usually result in Lower Volatility, with more buyers and sellers, creating more tighter price gap in the order book, meaning the price movement will be less compared to lower liquidity when the price of order book will usually broader. But it also will depends on how decentralized those liquidity were, if the assets have high liquidity but it was owned by small amount of people, I think it will also have different effect.

Wrong but we are all leaning, what I am expected to say about liquidity and volatility..
First lemme start with the volatility; this refers to how an assets can instantaneous dropped/increased in price ( changing ratio of effects)..
While liquidity refers to as the total amount of fund being put into an assets to enable a continuous buying and selling. This is mostly provided by the project owner or anyone who is financially enough to provide liquidity to coin/token.
There could be liquidity in bitcoin Price that doesn't mean it won't drop but technically when looking from the other way we can say it both affect each others because when there's any bad news about bitcoin instantly you would see bitcoin declining in price immediately other coins following as well.

I would definitely say "no" on this assumption, if this assumption was indeed correct, thus high liquidity leads to high volatility then Bitcoin and Ethereum would be some of the most volatile crypto assets in existence.

Some months ago I've written an article on how to correctly apply the use of correlations into crypto trading and hedging strategies:

https://open.substack.com/pub/nils89/p/the-importance-of-correlations-in?r=2qzuk0&utm_campaign=post&utm_medium=web

I don't agree. because both it different. If high liquidity means buying or selling an asset without significantly affecting its price, and volatility refers to the rate like price increases or decreases. and if highly liquid assets like btc can be bought and sold easily. So, it not conclude that liquidity leads to higher volatility. Same factors like market sentiment, economic issue, and political events can contribute to asset volatility.

Although a market with significantly high liquidity typically has less volatility, this is not always the case. Depending on many variables, including investor sentiments and market conditions, the relationship between liquidity and volatility can change. Liquidity is something that indicates that we can buy that asset and not affect the price too much and volatility is how fast the price can change for an asset.

Despite having similarities, they are different and they complement each other very well. So you can take it as you want. They have different meanings. One could be used for the short term while the other one could be used for the long term. It depends on the assets buying and selling status.

I will look at the trading volume of those products to talk about volatility and liquidity.

Because here the OP is talking about the nature of time, not comparing over a wide enough period, with large markets such as gold, forex,... it is almost a part of the economy, so it is almost calculated. Drill bars immediately regardless of when you have large volumes of trades, and when those trades are large, then forced volatility will occur.

Returning to crypto, the truth is that we also understand that this market still belongs to the field of venture capital in the eyes of even large funds, although its potential is also being accepted, but the journey to achieving large-scale statuses such as stocks, gold,... will take a lot of time. That's why we hear a lot about an organization being able to manipulate prices in this market, they can easily direct behavior through news that directly affects excitement/fear also market participants.

High liquidity does not always cause high volatility too. For example stablecoins trading pair, here. https://www.bybit.com/en/trade/spot/USDC/USDT
You can see that both have enough liquidity to handle a total of over $3m in conversion value.

A definition that I found is that liquidity should not affect market prices. https://www.investopedia.com/terms/l/liquidity.asp

IMO, yes. Liquidity and volatility are connected, and I believe they can be divided into three categories in general view(my opinion).

# Low liquidity (i can say frozen) usually involves small transaction volumes, and asset owners may struggle to sell their assets due to a lack of interest from market and buyer. During periods of low liquidity, there are typically no significant price changes as investors are skeptical about its developments that still baby. This often occurs in the early stages when an asset enters unpopular exchanges (e.g in the crypto world).

# Medium liquidity involves a decent transaction volume but not a substantial one. Selling assets is relatively easy, but the moderate volume contributes to heightened volatility. I think this stage to have the highest volatility. This is usually a transitional phase where many significant investors begin to notice the asset. Some have already entered the market, while others are monitoring its movements.

# High liquidity (more liquid) , on the other hand, involves very high transaction volumes and people easy to convert their assets. Even large quantities of assets cannot significantly impact prices. Volatility decreases, and it takes longer for significant price changes to occur. This stage is characterized by stability and is reached when an asset has gained widespread recognition and acceptance.

Exactly, in my personal view, it's the medium liquidity level that makes an asset more volatile. This is because, at this stage, there is a decent transaction volume, making it relatively easy to sell assets. However, the moderate volume contributes to increased volatility, making price movements more erratic and unpredictable.

the inherent value of a company(based on produce and wholesale/manufactured cost vs sales). sets that value

however a "market valuation" is not based on the inherent value. a "market valuation" has many other things thrown at it to INFLATE it
listen to shows like sharktank when the investment seekers say "their revenue x3"

fiat shares valuation is a number where investors want to buy in at "x% undervalued" with the presumption that the share price they buy in at will reach the 'market valuation' in the 3x timescale

market valuation ---------------
                               /\/\   /\
      market price/\/\/      \/   \

....
however bitcoin also has value.. its a baseline everyone refuses to sell below because the cheapest place on planet to mine is x so no one wants to sell at a loss below X

bitcoins value sits below the market price

                       /\_/\     __
                      /       \/\/
market price/\/               ---
                         ---------
bitcoin value------


remember because fiat is inflationary and bitcoin is deflationary.. the way you view "valuations" is different
remember market valuations mean different things to a assets inherent value

remember bitcoin does have real world resources and costs backing it up(PoW). (however PoS crap coins dont)

---

i never "value" things based on 'market cap' or 'market valuation'

i prefer to value companies and assets differently

if i looked at a company and seen their wholesale to retail margin is 50%
i then take their sales and minus 50% to get to a figure of underlying cost. if the company was to get into trouble and needed to do a "price crash" sale of selling goods at cost. well that would be the baseline value. the liquidation amount

with bitcoin i dont look at market price of market cap. i look at cheapest mining on the planet to acquire bitcoin. and thats its value

I once attended a conference, where some very clever ex-wall street traders explained a few different strategies and this was one topic that came up. Traders love volatility because they are able to make big profits from "betting" on how a certain stock will perform and if the market is quiet they do not earn as much. Crypto is very volatile when compared to the regular stock market, which would take a rare occurrence for it to double in the space of a year, but somewhat comparable if you compared individual cryptocurrencies against individual companies - there is always a growth story happening somewhere. However you need to be aware that companies in the stock market are actually producing tangible goods or services, which makes a profit, which gives their shares inherent value, which is not the same for crypto.

There is some, the lower liquidity means the higher possibility of volatility. I understand that it is not going to be easy for everyone but it is definitely an issue that will not be all that simple. Think about it this way, if there is very little amount being sold, then if you buy it all, then you will skyrocket the price, or if there is minimum amount being bought, then when you sell it all the price will go down.

So liquidity matters, doesn't mean the highest liquidity coin bitcoin is not volatile, it is also volatile there too, but at least it can't crash due to single whale, or at least it would have to be some huge whale, like those big corporations that have tens of thousands of bitcoins to end up sell all their coins at the same time to crash it, and publicly announce it as well. I think it is quite nice situation to have your money at the highest liquidity coin, it makes you realize that you are going to be fine daily, maybe longer term still requires attention, but not flash crash type of deals.

Nah, I won't say it because volatility can't be directly proportional to high liquidity, in some cases it might be but at most it is not. For example, BTC no doubt has high liquidity and high volatility but USD dollars or any other forex token also have high liquidity but they are not so volatile. I hope this will be of some help. If still not then try to think of it from another angle.

Which is, when BTC has high liquidity it means the trades can be made seamlessly without any stop, it means one can sell 100 BTC even if there are no 100 BTC buyers at the other hand due to the liquidity pools of exchanges. And when that happens the demand and supply ratio is disturbed. Like when 100 BTC is sold and the buying pressure is lower then there will be more supply than demand and we all know BTC prices make changes based on demand and supply as it is a decentralized coin.

Therefore, high liquidity might mean high volatility in terms of BTC but for stocks and forex, it might not be so true.

I think there is, the more supply, the more volatile the market is.

But in my opinion, the only essential factor that would really decide whether a crypto is "volatile" or not is whether it's designed to be that way, lapses on the coding, etc., or not. Take bitcoin for example. Its 21 million supply should in theory not induce some sort of volatility, I mean for crying out loud the amount's pretty low for a global currency in the first place, but Satoshi forgot, or perhaps deliberately made it so that bitcoin's allowed some form of volatility for profit. until it snowballed into this billion-dollar industry that we're now enjoying every single penny out of. Design is important cause no matter how much coins there is on your project, if it's not made for volatility/profit, it's never going to be volatile.

The volatility depends on both the market liquidity and the supply. Yes, more liquidity leads to higher volatility, but only if the asset is scarce and the supply of that asset is limited. If Bitcoin was abundant on the markets(which is the opposite of scarce) the BTC volatility would be way lower, even though there's enough market liquidity.
There's an army of BTC HODLers, who help in keeping the BTC price high(because they don't sell their BTC). The Bitcoin price would collapse, if they decide to mass sell everything they have. I can't agree that Bitcoin market liquidity exists on the same level 24/7.
I think that the liquidity is closely connected to the market demand for BTC.
Sometimes, there's higher liquidity and there are periods when the market liquidity goes down.

Not necessarily. I think they are two different concepts in crypto and finance but you can understand both if them side by side.Basically liquidity is how easy you can turn it into cash and that doesn't automatically mean it's a rollercoaster in value or volatile. Take Bitcoin that is super easy to sell that makes it liquid but it can be all over the place in terms of price then volatile.

It's very easy to explain volatility and liquidity using bitcoin. Sometimes, it's possible that the bitcoin market will experience low volatility but you will still get high liquidity but the liquidity is dependent on how large the quantity of the bitcoin you have in your possession. With 100, it will be very to easily converted all that into other currency like usdt or any other type of stable coins but if an institutional investors want to convert there bitcoin into cash, it will be very difficult. Just like Microstrategy btc, even if the bitcoin volatility are high, it's impossible for such bitcoin to be liquid in a single transaction because the market is still young.

However, the market is better and more liquid of bitcoin to other altcoins, there are some altcoins even with high volatility, you will get nothing but zero value, if you even attempt to liquidate assets from such altcoins, the project will die immediately with -99% without a second thought. This is one of the challenges of investing in altcoins, they don't have much liquidity to handle sells pressure.

Nope, liquidity is no where corelated to the volatility and you will find some shit coins within almost no liquidity but they are highly volatile. It's just that Bitcoin or any other crypto (not all) are easily traded internationally through the CEX & DEX, you are confusing between ease of availability with volatility. Volatility is the nature of crypto and it will continue to remain volatile and also easily accessible for trading or converting into cash/fiat compared to other investments like stocks as the later are controlled and has to go through a process but Bitcoin is free from these controls.