A liquidity crisis occurs when there is a sudden shortage of available funds in the market. In cryptocurrency, this happens when traders and investors are unable to buy or sell assets without significantly impacting their prices. This situation can arise from a variety of factors, such as market panic, major sell-offs, or increased regulatory scrutiny. When many people try to sell their assets at once, demand may not keep pace, leading to plummeting prices. During a liquidity crisis, exchanges may experience congestion, causing delays in transactions and further increasing uncertainty. This can fuel a negative spiral, where more investors rush to sell their holdings, exacerbating the decline in prices. In extreme cases, a liquidity crisis can lead to insolvency for certain exchanges or projects, as they struggle to meet withdrawal demands. Overall, maintaining liquidity is crucial for market stability, helping to ensure that investors can transact without dramatic price swings.