This article was first published on Insights – Ripple
We are watching history unfold. Similar to the 2008 financial crisis, books will be written about the events that are transpiring in the global markets today. But just like the 2008 financial crisis, collectively industries will grow stronger together. It’s more critical than ever to provide education around the fundamentals of liquidity and its importance to global markets.
At its most basic premise, liquidity refers to the ease with which assets can be converted into cash without dislocating the market. Generally speaking, the greater the volume, the higher the liquidity and the faster the matching between buyers and sellers.
The marketplace for U.S. Treasury Bonds represents an example of this. Banks serve as middlemen in the market, matching buyers and sellers. Traditionally, when the stock market declines, investors flock to the bond market as a safe haven alternative. This increased activity results in a highly liquid market where it is easy to match buyers and sellers because the difference between prices offered by sellers and sought by buyers is very small.
Today, we are seeing a rare mismatch in this bond market because of fallout effects from the coronavirus. Sellers are dumping equities and bonds, and many investors are sidelined. This creates a gap that leads to an illiquid market where banks have difficulty connecting buyers and sellers efficiently.
Liquidity is key to exchanging any asset—whether it be bonds or digital assets—quickly, easily, and cheaply. Greater liquidity also helps increase the size or volume of trades that can be processed by dependent systems.
It follows that liquidity around the digital asset XRP is the lifeblood of Ripple’s On-Demand Liquidity (ODL) for cross-border payments. XRP can be sent directly, quickly and cheaply, without needing a central intermediary, making it a convenient instrument in bridging two ...
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