Liquidity is a crucial measure of how easy it is to exchange a particular financial asset for another in the market. When it comes to cryptocurrencies, the liquidity of a digital asset indicates how easy it is to trade it or exchange it for another digital asset or fiat currency.
Liquidity is a measure of demand and supply - a more liquid asset enjoys higher trading and lower volatility. On the other hand, tokens with lower liquidity are more susceptible to high levels of volatility when exchanged in the market.
A crypto asset can be considered liquid if a buyer interested in it can access it at the same time a seller wishes to sell it. In such an instance, an exchange of the asset in the market would not cause its price to fluctuate as the demand meets the supply. However, if demand outstrips supply, we could see the cryptocurrency's price rising due to lower liquidity or availability of the asset in the market.