Is there a correlation between liquidity and volatility? - page 3.

dimonstration

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Quote from: alastantiger on December 02, 2023, 01:39:27 PM

Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

This is wrong analysis. The higher liquidity means the lower the volatility since the big sell and buy pressure can be absorbed by the available liquidity without resulting a huge price impact. DEX is the best example on this case since it decentralized, The higher the liquidity pool is the lower volatility happening on a certain token assuming that price action on CEX is excluded.

The reason why crypto is too volatile despite we have huge liquidity is because CEX manipulating the price with their automated market maker. It reacts to the price trend happening across all exchange and create an order accordingly.

Dr.Bitcoin_Strange

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Quote from: alastantiger on December 02, 2023, 01:39:27 PM

Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

From what I have seen so far, I think that's right because I have seen some coins and tokens whose trading volume (liquidity) was very low on the first exchange it was listed on (a swap DEX), but after the same token got listed on a tire 2 CEX, the liquidity grew and the token became very volatile. Another one was that I was tracking one newly listed coin on Binance some weeks ago, and when I saw the coin, it only had a $44 million dollar liquity and was trading around $0.02. Later the next day, I saw that for that same coin, the liquidity was $150+ million and it was trading around $0.58.

What I know is that Bitcoin or other cryptocurrency is a much more volatile asset than gold, real estate, and other businesses that you have mentioned. The crypto market is only and takes place at the same time by different calibers of people (whales are also involved), and demand is high, but since gold and real estate are done more traditionally, I feel it's very slow compared to the cryptocurrency market, and that's because crypto is more volatile and liquidity has an influence on the volatile nature.

btc78

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dont they have an inverse relationship?

if there’s high volatility investors might feel hesitant to buy or sell often waiting for the perfect time to finally enter or exit the market hence the decrease in liquidity

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There is generally a correlation between liquidity and volatility in financial markets. When liquidity is high, meaning there are many buyers and sellers, it tends to dampen volatility as it’s easier to execute trades without significantly impacting prices. Low liquidity often leads to higher volatility as even small trades can have a larger impact on prices. Other things can also influence volatility like market sentiment, economic events & geopolitical factors.

franky1

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Quote from: hugeblack on December 03, 2023, 02:59:02 AM

What gives fluctuation in price is supply and demand and the rate of change between them. If the rate of change of supply to demand were constant, the price would be stable regardless of liquidity. If we take real estate as an example, it is considered one of the assets that is difficult to liquidate. However, severe fluctuation in its prices can occur. Just like gold, the market varies according to markets, but in the end, stable supply and demand, or the rate of change between them that is not abnormal, is what makes the price of gold somewhat stable, which is what makes real estate and Bitcoin fluctuate despite the difference in liquidity between them.

i laugh at the highschool lessons you have been taught..
"supply/demand" is a meaningless expression unless you understand the context of such words

EG supply..
in 2012 there were only 11.5m btc in circulation.. in 2023 there are 19.5m..
more "supply" now yet prices are >6000x compared to 2012($6)

EG demand..
if bitcoin was only sold/mined/used in america, on american exchanges that only allowed americans to trade. the demand would fix the price to a smaller speculation range/window. it wouldnt matter if the exchange had reserves of 2m btc or 200k btc. the price would only pivot within a smaller slimmer range

hugeblack

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What gives fluctuation in price is supply and demand and the rate of change between them. If the rate of change of supply to demand were constant, the price would be stable regardless of liquidity. If we take real estate as an example, it is considered one of the assets that is difficult to liquidate. However, severe fluctuation in its prices can occur. Just like gold, the market varies according to markets, but in the end, stable supply and demand, or the rate of change between them that is not abnormal, is what makes the price of gold somewhat stable, which is what makes real estate and Bitcoin fluctuate despite the difference in liquidity between them.

CryptopreneurBrainboss

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Quote from: alastantiger on December 02, 2023, 01:39:27 PM

However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

Quick question, does Bitcoin have more liquidity than the Forex market? I know your answer is No so why then do you think the more liquidity of an asset, the higher the volatility?. When there's more liquidity the market tends to be less volatile that's why the Forex market is less volatile than that of Bitcoin. Volatility comes from a market that can be easily manipulate like the crypto market (in this discussion, Bitcoin market). There are other factors that's making Bitcoin volatile which lack of regulation is one of them and that the assets is still a new one (having less traders as other market).

There are some amount of trade that if they're carried out on exchanges, the exchange won't have the liquidity to handle them and would cause a force maintenance for the exchange. Volatility of Bitcoin comes from the fact that Bitcoin is a free market so irrespective of the liquidity, the market will be volatile for that reasons but as more liquidity and institutional investors comes into the industry, the price would begin to be more stable than it usually is. When there's no liquidity that's why an asset can be manipulated and it becomes more volatile so don't think high liquidity equals to more volatility, it's the other way around.

oktana

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I agree with the saying that the higher the liquidity, the higher the volatility. Bitcoin is only possible to undergo all the price change at the speed it is because it’s liquid, hence it’s easy to cash it out. But what if the liquidity was reduced to half or even quarter of what it is currently? I think because of that, the price shouldn’t see any significant changes compared to when the liquidity is normal. However, in as much as Bitcoin has good liquidity, the volatility doesn’t show as much as most other cryptocurrencies.

franky1

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things like gold have set market rate which they control the international rate with things like "circuit breaks" to stop large price movements. they also select certain markets to sell gold for more controls

however bitcoin is truly an international market where there are many markets..

what you have to learn is that bitcoin mining in iceland is 10x cheaper than mining in japan/hawaii
so pacific ocean countries are willing to pay alot more market price because its below mining cost..
where as the northern atlantic/norweigen sea/siberian sea touching countries are mining and would rather sell

because the controls are not there to stifle free market. the price can vary alot when different countries have higher demands than others

take gold again. it might seem cheap to mine gold in africa. but the big quarrys are american/EU managed so the natives dont get to sell at a premium and push the price down to their cost rate. they instead just get paid low salary as employees. the americans/EU managers take it to us/eu and sell it for profit whilst keeping the markets inflated to not crash down to african true mining cost rate

alastantiger

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As we understand, liquidity refers to the rate at which you can easily sell an asset or investment and convert it to cash (this is the best way I understand it). Some investments include stocks, cryptocurrencies like Bitcoin, real estate, high-end wristwatches, and more. Bitcoin is highly liquid because at any time of the day, year, or at any place I am, I can easily sell my Bitcoin for cash. However, Bitcoin and other cryptocurrencies are also very volatile compared to other assets or investments. Yes, they are liquid but not necessarily non-volatile. Can I, therefore, conclude that the higher the liquidity of an asset, the higher its volatility?

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