Some
call it the future (Hockett, Forbes) and some, the “solution (Nakamoto, Bitcoin
founder).” The fledgling word, cryptocurrency, cascades the news and has
settled as the “it-girl” in every tech-savvy block. Desirable as it is, it has
successfully seduced young and ambitious investors and entrepreneurs into a
game, where a handful won millions, whereas the majority, stumbled downhill.
Cryptocurrency remains controversial, with descriptions like “scam (Jamie
Dimon, CEO of JP Morgan)” and “worthless (Warren Buffett, investor),” insulting
the value it brings upon the era. Thus, it has become crucial for not just
investors and entrepreneurs, but also the everyday people to clear the air,
define its strengths and weaknesses, and ultimately realize that this “it-girl”
is also just a developing teenage kid, a work in progress, yet something worth
looking out for.
Before
jumping into the cryptocurrency world, it is crucial to understand what it
bases upon: liquidity. Thus, we walk you through the steps of what liquidity
is, what the problem of liquidity in cryptocurrency is, then suggest a few
solutions to such problems.
1. What is liquidity?
Liquidity is a degree to which an asset can be
converted into an expected amount of value. A perfectly liquid currency does
not affect the stability of the general asset, and the converted amount
maintains its full value. Within the cryptocurrency world, assets are converted
between one coin to another or coin to cash and vice versa. Liquidity is
crucial, as traditional financial firms do not keep assets as idle cash, but
rather distribute parts as investment, deposit, funds, or securities.
Markets prefer high liquidity; High liquidity
indicates vibrance and confidence in the market which ultimately provides
predictable, quick and easy trade. Cash is currently the most liquid asset, yet
it comes with various problems. Thus, the blockchain technology aims to achieve
such perfect liquidity.
Many factors affect liquidity, including trading
volume, participating population, number of exchanges, and acceptance within
society. Trading volume is one of the most important factors; It is the total
amount of coins that have been transacted in the exchanges. Large trade volumes
allow fair trade. Such stability roots from basic economics of the invisible
hand.
Say Columbus first brought spices to Korea.
People love it because it’s new and weird, so people from Jeonju come and buy
it for hundreds of dollars. After a while, there’s enough supply and the craze
declines. Now only those who are interested in it will trade it for a fair
price. Thus, a large trade volume allows individuals to finalize on a
equilibrium price that lowers arbitrage and ultimately allows fair trade. The
same applies for cryptocurrency. Within a small population, the craze peaked in
2017, where people invested for reasons of curiosity and hope. The abnormal
surge is yet to settle, but the more people correctly understand, regulate, and
utilize the cryptocurrency, the more stable and liquid it will become.
There are two types of measures for this
liquidity:
·
24h Volume: This volume measures the coins that
have been traded in the last 24-hours’ time frame.
·
Market Capitalization: This volume measures the
aggregate value of a security. In cryptocurrency, market cap is calculated by
multiplying the circulating supply of tokens by the current price.
Participant population also affects liquidity.
When trading through blockchains like Bitcoin, an additional block is added on
the blockchain to prove an irreversible payment. Also, when miners solve blocks
by mining, they need confirmation by peers in order to fairly obtain the
Bitcoin. Usually, Bitcoin processes between 10-15 minutes, and transactions
between $1,000 to $10,000 need three confirmations from peer nodes (Buy Bitcoin
Worldwide). Therefore, having many nodes that serve to solve and confirm
transactions results in swift transaction.
Number of exchanges is also one of the big
factors that affect liquidity. Exchanges are businesses that allow
cryptocurrency users to trade one from another, including conventional fiat
money or other digital currencies. Number of exchanges parallel to how widely
it is accepted within the society. Currently, large corporates such as
Microsoft, Expedia, and Bloomberg accept the usage of bitcoins. Thus, more and
more people are able to access the currency on a daily basis.
2. What is the problem
with liquidity in crypto?
Liquid
assets, as mentioned above, must retain its original value. Many of the factors
take away from cryptocurrencies’ full liquidity. Volatility is the foremost
deducting point. Value of the asset is easily inflated or manipulated, as the
participating population is small. Software hacks and operational failures
aggravate the situation, as users lose large amounts of trust. Even if the time
consuming transactions are successful, fees are sometimes irregularly high, as
a few monopolistic exchanges overprice their services. Because of the overall
confusion, new investors hesitate to set foot in the field at all.
Cryptocurrency faces
ongoing problems without a definite direction. The government proposes that it would
invest and make regulations if there are more funds, information and companies
circulating the field. Investors and companies also hesitate to explore, as
they have seen a sharp downfall of cryptocurrency. The two parties remain in a
stalemate.
3. What are some
solutions for liquidity issues?
Solutions relate back to
liquidity. Currently, liquidity is divided, as many payments and platforms
operate as an individual entity. Consequently, their pool of money and
transaction partners are limited, limiting the overall supply and liquidity.
Therefore, Companies should work together to build larger pools by using means
like business merging, integration or acquiring. Further, less corporate
limitations polish user experience. For example, certain tokens require the
purchase of BTC and ETH in order to exchange. Inconvenient restrictions and
complexities drive away users, even if the product is innovative. Finally,
governmental regulations and interference are crucial. Governments should take
initiatives in investing into the newborn technology and allow investors to
follow the exciting venture.
4. Conclusion
Once we dive into the
details of cryptocurrency, we realize its endless potentials, yet at the
same time, recognize that it is a work in progress. Liquidity becomes the
foremost key to the existing problems within cryptocurrency. Achieving this liquidity
will become a remaining goal for us to work on.
Works Cited
Hockett, Robert. “Money's Past Is Crypto's Future.”
Forbes 10 dec 2018. Print
Montag, Ali. “Warren Buffett Explains One Thing People Still Don’t
Understand about Bitcoin.” CNBC May 1, 2018
Nakamoto, Satoshi. “Bitcoin: A Peer-to-Peer
Electronic Cash System.” October 21, 2008
Monaghan, Angela. “Bitcoin is a Fraud that will
Blow up, says JP Morgan Boss.” The Guardian. September 13, 2017
Blockchain, Bitcoin Wallet Users (March 4,
2019). Retrieved from https://www.blockchain.com/en/charts/my-wallet-n-users
Buy Bitcoin Worldwide, Bitcoin Confirmations
(March 5, 2019) Retrieved from https://www.buybitcoinworldwide.com/confirmations/.
