Thoughts on cryptoasset liquidity.
Some Cryptocurrencies have poor liquidity, yet marketcaps in the hundred of millions. The relationship between network value and liquidity is captured in the NVE ratio. It can be used to indicate risk from poor liquidity.
Calculate it by dividing USD Network Value with USD Exchange Volume.
If the NVE ratio is high, it’s an indicator that liquidity is low in relation to the network valuation. It’s an indication that relative small money could move the price significantly. The network value might be based on a few players exchanging small money. Sudden increase in exchange transactions might create a lot of volatility. With a high NVE, price and network value could be artificially high. The price could be fake.
On the other side, as liquidity is attractive to traders and investors, there is potentially bargains to find among coins with poor liquidity and solid fundamentals.
As can be seen from the NVE ratio, Decred liquidity is low. There could be high risk/volatility from transactions. Like mentioned above, it could also indicate an opportunity hidden in poor price discovery.Bitcoin liquidity was bad in the early days too. However, to the insightful few, certain fundamentals was obvious and they didn’t mind hodling for the longterm through the volatile market swings. The BTC exchange infrastructure was really bad, placing limits on liquidity and new money coming in. As can be seen on the chart, Bitcoin liquidity has been improving steadily.
Not investment advice.