"LongHash Column: Competition Coin Price Spread Far Higher Than Bitcoin, What Does It Mean?"

The first-mover advantage of Bitcoin has brought about significant network effects, which is no longer a secret. However, what are the true advantages of these effects? Previously, we have published articles explaining that Bitcoin's relatively low price volatility is a major advantage, but liquidity and slippage are two other factors worth considering.

Liquidity is an important factor in determining whether individuals can quickly buy or sell an asset without causing significant price fluctuations. An asset that can be sold or exchanged for another good or service in a timely manner without affecting market prices too much is considered a liquid asset. Traditional fiat currency (cash form) is the best example of an asset with high liquidity, as it can be used to directly purchase goods and services. On the other hand, real estate is considered an illiquid asset because finding a buyer willing to purchase the property at market price may take several months.

Slippage is often a side effect of inadequate liquidity. Slippage refers to the difference between the expected price and the actual transaction price at the current market exchange rate on a particular exchange. For example, if someone wants to sell a cryptocurrency worth $1 million on an exchange and wishes to complete the transaction quickly, they may have to sell a portion at a price lower than the market rate because there are not enough buyers at the latest transaction price.

While many cryptocurrencies can be easily transferred globally within seconds, most of them have poor liquidity. As shown in the data from Cryptowatch as shown in the above figure, Bitcoin is currently the most liquid cryptocurrency in the market so far—excluding USDT, even more so.

Ethereum is the only non-stablecoin cryptocurrency besides Bitcoin with 8-digit liquidity. Among other cryptocurrencies, only Litecoin, Ripple, EOS, and Bitcoin Cash have over $5 million in liquid bids.

Liquid Bids is an indicator defined by Cryptowatch, which represents the total sum of all bids within 100 basis points of the best bid in the market. Liquid Asks follows a similar concept. In other words, this data can show the total volume of orders for each cryptocurrency on the order book within a 1% price difference from the market price.

If you are trading cryptocurrencies and monitoring the price of a particular asset, you need to ensure that the coin has sufficient liquidity to allow you to exit at any time. Most cryptocurrencies have poor liquidity, making it challenging to exit without slippage.

Due to the difficulty of entering and exiting positions caused by poor liquidity, these altcoins are challenging to use as a store of value. When there is no place to exchange your holdings without accepting a significant price difference, do you still believe in the value of the coins you hold?

This is not just a theoretical issue. In reality, the impact of slippage is evident in various financial services related to cryptocurrencies. In 2017, Elizabeth Rossiello, the CEO of BitPesa, stated that she had to be pragmatic when integrating new cryptocurrencies into the company. The company has been providing Bitcoin liquidity to individuals and institutions since 2003.

Rossiello once said, "If you can tell me that everyone is using this currency, it has super liquidity, no slippage, and you have brokers in six markets who can provide you with liquidity, and they can give me some credit or some benefit—then I'm in."

Slippage can also directly reflect on the costs associated with various cryptocurrency services. For example, cryptocurrency lending platform Nexo determines loan-to-value ratios based on the liquidity and price volatility of specific assets. Users who deposit Bitcoin can borrow up to 52.7% of their deposit, while users who deposit Stellar can borrow up to 17%.

On the online financial platform Uphold, the trading fees for niche altcoins like BAT or Chainlink are more than twice that of Bitcoin.

These are examples of the advantages of the Bitcoin network effect in the real world.

This article is from our partner LONGHASH

Further Reading

• Chinese Media Reveals: Digital RMB Will Be Piloted in Xiong'an with 19 Brands Including Starbucks and McDonald's

• Stablecoin Total Market Value Surges by $3 Billion Since the Beginning of the Year, Where Does the Demand Come From?

Join Telegram now for the most accurate blockchain news and cryptocurrency updates!