What is liquidity (Liquidity)?
Liquidity is the ability to quickly convert an asset into cash at a valuation close to the market price (called market price), or at a favorable price (fair value).
Where does liquidity find its application?
Liquidity finds its application to all assets:
- currency,
- cryptocurrencies,
- Bonds,
- shares,
- derivatives,
- real estate,
- raw materials,
- collector assets,
- personal use items.
What are the characteristics of liquidity?
There are two basic elements that determine the level of Liquidity:
- The cash price (known as the sell price) – high liquidity means conversions that are as close to the market as possible, where the transaction does not significantly affect the market valuation.
- The monetization time (so-called search time) – is a value that determines in how long an asset can find a buyer. The waiting period is the time during which losses can be generated.
Factors affecting the liquidity of an asset
Here we also distinguish two factors:
- Fungibility (aka fungibility ) – a value that tells you that the easier a unit is to replace, the easier it is to resell.
- Universality of demand (also known as marketability) – a value that reports that the greater the demand for an asset, the faster it disappears from the market (examples: oil, securities).
