Crypto Exchange Liquidity: What is it, and How Does it Affect Trades?

A crypto exchange uses liquidity to keep the wheels turning smoothly for their users. Liquidity ensures you can buy, sell, or swap assets quickly and at competitive prices. But what exactly is liquidity, and why should it matter to you as someone who wants to use a crypto exchange?

What is liquidity?

Liquidity is all about how readily available cryptoassets are to buy or sell without big price changes while in the middle of the action. In a nutshell, the more users there are, the better liquidity is.

Imagine you’re using a decentralised crypto exchange called ABC to trade Bitcoin. When ABC has high liquidity for Bitcoin, it means there are a lot of users actively buying and selling BTC.

There may come a day on ABC where there is low liquidity. This is where fewer users are trading Bitcoin. Maybe there’s only one seller and a handful of buyers.

This means that when you want to sell your crypto, you may have to accept a lower price than you wanted to, because there is no one around to buy it at the price you are seeking.

Early DEXs vs now

In the early days of DEXs, buying and selling relied solely on direct peer-to-peer matching. A trader's order, specifying both price and quantity, required a corresponding seller. This model frequently resulted in illiquidity, particularly during periods of market volatility. Consequently, significant price fluctuations, including sharp drops and spikes, were commonplace.

Then came the introduction of automated market makers (AMMs), pioneered by Uniswap.

AMMs introduced the concept of liquidity pools. Any participant could deposit a trading pair, such as ETH and USDC, thereby contributing to the pool's liquidity.

In return, liquidity providers earn a proportional share of the trading fees generated when the pool is used.

This innovation provided continuous liquidity, even during volatile market conditions. However, liquidity provision in AMMs is not without risk. Liquidity providers are exposed to impermanent loss, which becomes more pronounced with less liquid tokens.

Despite this risk, the potential for substantial returns, with annualised percentage rates (APRs) occasionally reaching as high as 10,000%, continues to attract participants to providing liquidity.

What happens on CoinJar

CoinJar sources liquidity through market makers, and other exchanges and CoinJar can be a market maker of the last resort. But what does this mean?

On CoinJar, when you want to sell your Bitcoin (or other crypto), you don’t have to wait around for someone specific to buy it from you like you might in a person-to-person marketplace like ABC.

CoinJar operates as a centralised exchange, which means CoinJar handles the buying and selling process for you. When you press “sell” (like the “sell maximum” option), CoinJar typically absorbs your order by matching it with existing buy orders or buy/sell orders available on other exchanges.

This is why you can usually sell right away without waiting. It’s designed to be fast and easy, especially in a high-liquidity environment.

Crypto exchange liquidity in practice

Here’s how it works: CoinJar has two main ways to sell. The first is through the regular CoinJar app and the second is through CoinJar Exchange.

In the CoinJar app, when you hit 'sell' to convert Bitcoin to cash (like AUD, GBP, or USD), the process is designed to be instant. CoinJar matches your order with other buyers or sellers on the platform where possible. If no competitive match is available, CoinJar steps in to buy it from you or sell it to you, using the best buy/sell prices sourced from other exchanges.

On the CoinJar Exchange (their advanced trading platform), you can place a “market order” to sell immediately at the best available price from the order book (a list of buy and sell offers).

Because CoinJar has a lot of activity and liquidity, there’s usually a buyer or enough funds in their system to complete your sale quickly.

Do users ever have to wait? Usually, sales happen right away, especially for popular coins like Bitcoin under normal market conditions. However, this isn’t guaranteed if (a) there are no buyers at any price (b) if the price on CoinJar would cause excessive slippage, or (c) during rare events like an outage.

But there are rare cases where you might notice a delay:

-If the market is a bit wild (like during a huge price crash or spike), the system will adjust prices to ensure the transaction goes through quickly, rather than delaying the process.

-For less popular cryptocurrencies with lower trading volume (low liquidity), it is instant, but the price might be adjusted to make it instant.

Crypto exchange buyers and sellers

So, to sum it up: CoinJar aims to make selling seamless by always trying to match your trade with other buyers or sellers on the platform. If no matches exist, CoinJar might take the opposite side of your trade, using buy/sell prices sourced from other exchanges. Most of the time, you just press sell, and it’s done quickly!

Another option for people doing trades over US$50k, is that they can use the OTC desk. This is where a crypto exchange that has good liquidity will do the exchange for you. This means there is no slippage and you get the price quoted.

(Slippage on crypto exchanges is when you try to buy or sell a cryptocurrency, but the price you end up getting is different from the price you expected when doing the trade. It happens because prices can change fast in the crypto market. Imagine buying chocolate from a vending machine. When you press buy it says $2 but when it falls into the tray below you are charged $3.)

The bigger picture: Liquidity in 2025

As the crypto market matures, liquidity is becoming important for exchanges. Platforms like CoinJar use partnerships and tech to keep order books full.