Liquidity is how easily an asset can be bought or sold without moving its price much. A highly liquid market has many buyers and sellers and a tight spread, so a trade fills quickly at close to the quoted price. A thin, illiquid market does the opposite.
Liquidity matters most precisely when you want out. In calm conditions even an illiquid asset trades fine, but in a rush for the exits, thin markets can gap lower because there are too few buyers to absorb the selling. The price on screen is only real if someone will trade at it.
Size interacts with liquidity: a large order in a thin market moves the price against itself, an effect known as slippage. This is why liquidity, not just price, belongs in any decision to enter or leave a position.
Worked example
Bitcoin can absorb a large trade with little price impact; a tiny altcoin may move sharply on the same order.
This definition is general education, not investment advice. Markets — especially crypto — are volatile and you can lose money. Please read our disclaimer and see our methodology.