High on-chain volume often indicates strong network activity and increased demand, potentially foreshadowing price rises. Conversely, declining volume may signal weakening interest and impending downtrends. It reflects real usage rather than just exchange speculation.
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In Bitcoin’s sharp swings, derivatives hedging (futures/options) effectiveness depends on liquidity. High liquidity: short futures/put options offset losses. Low liquidity: slippage/price gaps weaken hedges, increasing actual losses.
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During market fluctuations, the order book depth usually decreases, indicating a reduction in market liquidity. The bid - ask spread widens, which means that the cost for investors to buy and sell cryptocurrencies increases, reflecting increased market uncertainty and risk.
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