Liquidity

Liquidity is how easily an asset can be bought or sold in size without materially moving its price. A liquid market has many active buyers and sellers, tight spreads, and deep order books; an illiquid market has few participants, so even modest orders push the price around.

For example, selling $1 million of BTC on a major exchange typically moves the price only slightly, because the order book absorbs it. Selling $1 million of a micro-cap token might crash its price by double-digit percentages, because there simply are not enough resting buy orders to take the other side.

Liquidity varies by venue and by time: the same coin can be liquid on one exchange and thin on another, and liquidity often evaporates during panics, exactly when traders need it most. In DeFi, liquidity refers to the funds deposited in pools that automated market makers trade against, and the same principle holds — small pools mean high price impact. A common misconception is equating high trading volume with liquidity; volume measures past activity, while liquidity is about the depth available right now, and reported volume can be inflated by wash trading.