Understanding market liquidity and depth in crypto trading

Liquidity represents the ease of buying or selling an asset without significantly impacting its price, while market depth refers to the volume of buy and sell orders available at various price levels in the order book. High market depth allows for large orders to be executed with minimal slippage, whereas low depth can lead to extreme price volatility. Market makers often withdraw orders during periods of high volatility, causing the order book to thin out. A historical example occurred on February 22, 2021, when Ethereum (ETH) prices on Kraken plummeted to $700 due to insufficient liquidity, while the broader market remained near $1,546.