Gold’s Liquidity Advantage

Gold is vastly more liquid than Bitcoin in investment markets, according to a new report from JP Morgan Chase & Co. which states trading volume in the cryptocurrency is declining to a level that can carry dangers for investors.

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Liquidity is a measure of trading activity in an investment. High liquidity means it is easy to buy and sell, whereas low liquidity implies that it is far more difficult to purchase or to exit at a favorable price.

The report states gold trades $100 billion every day in financial markets, ten times the level of trading in Bitcoin. That figure doesn’t even account for all the hard gold transactions that occur around the globe every minute.

“Low bitcoin market liquidity provides one explanation for the large price impact of a small flow or volume on bitcoin price,” says Nikolaos Panigirtzogou, a cross asset research analyst for the bank.

In other words, low volatility is an important factor behind the wild price swings in Bitcoin. When holders of the digital currency want to exit positions, to find a buyer they often must be willing to sell at a price well below what appears to be the current market price.

Panigirtzogou’s analysis indicates the low liquidity of Bitcoin makes the cyber currency as much as 20 times more volatile than an exchange-traded fund in gold.

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