Concept
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Liquidity refers to the ease with which an asset can be converted into useable tender (cash mainly). It is an important concept in financial market practices, as it enables market participants to achieve their desired goals. Buyers and sellers want to be able to convert their product into cash as quickly as possible in order to meet the profit incentive (for investors in equity markets) or the borrowed principal sum (for lenders e.g. in the bond market) that motivated them to approach the market in the first place. This can only happen in a market arena that is constituted by efficiency of processes, shared information and availability of funds.
Where a market is illiquid, buyers and sellers are at risk of loss due to the time exposure involved. The recent boom and subsequent sell-off in crypto-currencies is a good example. During the sell-off period, there were so many sell-side instructions that exchanges were neither able to process them in time nor match the sell-side to an appropriate buy-side order. This left crypto traders sitting on their hands unable to trade, as they watched the value of their holdings dwindle.
By the time their trades were processed, their losses were exacerbated due to the illiquidity of the market or exchange.