What are Liquid Assets and Liquidity?
In some economic articles, a liquid asset, also referred to as a liquid asset, is property or assets that are easy to buy and sell and can be easily converted into cash. One of the biggest concerns for investors is whether it can be easily sold in the market after a while and converted into cash after buying a new asset. This question does not have an exact answer, But it can be answered to some extent by considering various factors.
Some of the assets we are dealing with do not have a good market. For example, although old and so-called antique objects are very valuable, selling them in the job market is difficult. Real estate is similar, and it may take a long time to sell a home.
Buying assets that have high value but low liquidity is a risky move; This is because it is possible that when you need cash, it will not be possible to sell your assets quickly due to a lack of customers, or you may end up having to sell it at a much lower price than its real value.
Put, buying a liquid commodity or asset for which the customer always has cash is an important indicator, and you should consider it. In this article, we introduce you to the two concepts of liquid assets and liquidity and then look at some features, effective factors, how to calculate, and their importance. So follow us to the end of this article.
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What is a liquid asset?
One of the most important features of a liquid asset is its easy transfer of ownership. For example, dollars, euros, or gold coins do not require legal procedures to transfer ownership and can be easily converted into currency.
In addition, liquid assets have other characteristics, which are:
- easy access
- High exchange rate
- Low commission
- Sell at market price
There are a variety of assets that are inherently always liquid, and most large investors in their portfolios always use these assets. Gold, foreign currencies, stocks, bonds, and exchange-traded funds (ETFs) are among the highly liquid assets. Of course, it should not be forgotten that the liquidity of some of these goods may vary according to the economic conditions of each country.
In general, money is the most liquid asset in the world.
On the other hand, we are dealing with some goods that are different in terms of liquidity, and buying and selling and converting them into money is not so easy.
What is a non-liquid or non-liquid asset?
Illiquid Asset, also known as liquid or non-liquid assets, refers to a group of assets that can be converted into cash, little or even impossible in some cases. Liquid assets can be considered the opposite of liquid assets; Assets that, despite their high value, have few customers.
For example, suppose you have a painting by Jean Michel Basquiat worth more than $ 100 million. Although this work of art is very expensive, it is considered a non-cash asset due to the pricing and the customers who buy it.
It should be noted that the term non-cash does not mean non-cash, but it does mean that one has to wait a long time for such assets to be converted into money.
The issue of liquidity is not just a matter for individuals or investors but also for large corporations differently. Many companies need to determine the liquidity of their assets and investments when preparing their financial statements and to determine their debts and arrears.
Because illiquid assets often carry large amounts of risk and volatility, experienced investors devote a very small percentage of their portfolios to these assets. Homes and real estate, works of art, antiques, cars, and collectibles are all non-cash assets.
What is a cash or fluid market?
There is another commonly used term worth mentioning before we talk about liquidity. The term liquid or cash market, also known by other names such as liquid or floating market, refers to a market in which many buyers and sellers operate. In this market, buyers and sellers pay less for shipping in addition to a fair price.
The presence of numerous buyers and sellers in this market, in addition to reasonable and fair prices, is the small fluctuations that these markets have.
What is liquidity?
Liquidity is a term we’ve heard a lot. This commonly used term is an important attribute for goods and assets. It can be said that the definition of a liquid or non-liquid asset depends on this parameter.
There are various definitions of liquidity in economics; Some see liquidity as a measure of the ability to sell an asset at market price quickly, But others see working money as liquidity, and some economists refer to cash assets as the sum of money and quasi-money as liquidity. Perhaps the simplest definition of liquidity is cash.
If we want to explain this simple concept a little more scientifically, liquidity can be described as having a significant amount of highly liquid assets. Money is the most liquid asset possible; Therefore, liquidity and money can be considered equivalent.
In traditional markets, we have two general levels of liquidity:
- Market The Liquidity: ease of buying and selling goods or assets at a fair and equitable price. In other words, the liquidity of a market depends on the speed and liquidity of that asset. In any market, when the gap or price difference between seller and buyer (Bid-Ask Spread) is smaller, and the desired figures of these two sides of the transaction are closer, we face better market liquidity.
- Accounting: liquidity A at maturity. The measure of the ability to pay debts This amount is usually expressed as a ratio or percentage. Most investors invest in a company based on the amount of debt, cash, financial obligations, and available goods; Therefore, the issue of accounting liquidity is one of the important components in attracting capital, users’ trust, and preparing financial balance sheets.
Of course, there is another category called Exchange Liquidity in the digital currency market, which is a function of makers, makers & makers, and exchange rates listed in exchanges. In other words, liquidity in any exchange can be estimated from the exchanges and the pairs of values that are supported.
Liquidity calculation
As we mentioned, one of the main issues for companies is the issue of liquidity and its calculation. Because companies use a relationship called the Liquidity Ratio to test their ability to pay their debts, arrears, and liabilities. The liquidity ratio is calculated in three different ways, which are:
Current ratio current: liabilities by current assets, and the obtained number indicates the amount of liquidity.
Current liabilities refer to debts with a maturity of less than one year, and current assets mean assets that can be converted into cash in less than one year.
In general, the numbers obtained from the current ratio, which is one or higher, indicate the good condition of a company.
: In the Quick ratio, the numerical value of current assets is deducted from current assets, and the resulting number is divided by current liabilities.
Cash ratio: the total cash and the investments made are divided by current liabilities.
Since our article’s focus is not on calculating liquidity and the applications of these ratios, with a brief reference to this issue, we go to the digital currency market and the factors affecting its liquidity.
Factors affecting the liquidity of digital currencies
Transaction volume
One of the most important and influential factors determining the liquidity of a digital currency is the volume of transactions. Volume here refers to the number of digital currencies that have been traded on a particular platform in the last 24 hours.
In simple terms, a high volume of exchanges means more buyers and sellers, which means higher liquidity. To ensure the high volume of transactions of some digital currencies and their liquidity, it is better to check the volume of their exchanges in several large and reputable exchanges.
