Liquidity means the ease with which an asset can be bought or sold quickly without a significant change in price. Liquid assets are assets from which it is easier to get value (turn into money).
There is a relationship between liquidity and volume:
Higher market volumes create more opportunities for market makers to make profits by providing liquidity.
This attracts competition.
More liquidity is provided.
Volatility is reduced because the market can absorb large orders without changing the price.
High liquidity is good for investors as it reduces transaction costs and leads to greater price stability. This is evident on a day when the entire crypto market is in decline - less liquid "altcoins" suffer larger percentage drops than the more liquid "majors" (BTC and ETH).
Liquidity is also important because it determines the cost of buying or selling. If an investor wants to buy $100k worth of Bitcoin, it can be done immediately at the cost of a couple of basis points. A $100k order in an altcoin may need to be split into 5 separate $20k orders, each executed 1% further away from the average market price. In other words, it would cost $1k to open a trade in altcoin, while investing in Bitcoin would only cost ~$175. And the investor will again pay transaction costs when selling.
A simple example: there may only be offers to buy $10 million worth of DOGE at 5% lower
