Definition ∞ Liquidity contraction describes a reduction in the availability of assets that can be readily bought or sold in a market without significantly affecting their price. This condition indicates a decrease in market depth and trading activity. It often results in wider bid-ask spreads and increased price volatility.
Context ∞ In digital asset markets, liquidity contraction can occur during periods of market uncertainty, regulatory pressure, or significant price declines, leading to reduced trading volumes. This phenomenon can exacerbate downward price movements as fewer buyers are available to absorb selling pressure. Monitoring liquidity metrics is crucial for assessing market health and potential for rapid price shifts.
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