Methodology for reporting reliable liquidity indicators of the cryptocurrency market
Introduction
Comaps, which provides cryptocurrency information services, reported in November 2019 that daily trading volume of cryptocurrencies ranged from $50 billion to $80 billion. Coinmarketcap and investing.com, both globally renowned, reported similar. Contrary to the fact that the actual cryptocurrency market is somewhat stagnant, the market volume has grown more than twice as much as in 2018, many news media press reports citing this such data.
The volume of the cryptocurrency market is calculated through API data provided by the exchange, and most cryptocurrency statistics are also reported through the same method. However, we know that the volume offered by cryptocurrency exchanges is no longer an indicator of liquidity by the fact that many exchanges manipulate their transaction volumes.
In “Economic and Non-Economic Trading In Bitcoin: Exploring the Real Spot Market For The World’s First Digital Commodity”, Bitwise Asset Management reports, “The real average daily spot bitcoin volume to be $273 million, compared to $6 billion in reported volume, meaning roughly 95% of the volume was fake.” (Hougan, Kim & Lerner, 2019).
This manipulated data can confuse investors and industry officials, furthermore, the liquidity analysis of cryptocurrency markets.
Some cryptocurrency information webservices try to filter out fake transactions on cryptocurrency exchanges and to provide adjusted trading volume. Coingecko introduces exchange confidence indices to provide adjusted trading volume. On November 10, 2019, Coingecko’s total cryptocurrency volume was 27.4% lower than Coinmarketcap, and Bitcoin’s 29.5% higher. It is hard to think that the fake data has been filtered to a high level compared to the data that Bitwise published.
Coinmarketcap (November 10, 2019)
- Total 24H Vol. $61,308,217,468
- Bitcoin 24H Vol. $17,403,004,023
Coingecko (November 10, 2019)
- Total 24H Vol. US$44,530,049,130
- Bitcoin 24H Vol. US$22,545,652,628
Thus, the volume of transaction generated by a cryptocurrency exchange does not help to judge the size of the cryptocurrency trading industry. We need reliable liquidity indicators of real cryptocurrencies, not fake data.
Unfortunately, there are dozens of global cryptocurrency statistics sites, but most of them produce cryptocurrency volume indicators based on the information that cryptocurrency exchanges provided, which contains fake data. Comaps, as a provider of cryptocurrency information services, has set a mission to provide reliable liquidity indicators.
Methodology
It is quite difficult to completely distinguish between real and fake transaction volume provided by the exchange. One can measure the reliability of the API volume report by analyzing the average bid spread value, pattern of volume by time, and time of execution, but it is not easy to distinguish whether to make a fake for every execution.
To measure the actual cryptocurrency liquidity indicator, we analyzed the exchange’s web information and found significant results in the process. First, we analyzed the web traffic of the highly reliable exchanges reported by Bitwise. Based on the traffic, UV, bounce rate, and dwell time of each exchange, we obtained the standard index of the entire data, and again, compared the deviation rate between the standard index and each exchange to calculate, “Trust Score”.
(* Recent net traffic = bounce rate from recent traffic. Bounce Rate = The percentage of traffic that exits immediately after entering the website.)
We analyzed the data by applying the standard index and the deviation rate based on the above exchanges to 203 global exchanges.
What we found during this process was that if there were real trades and exchanges with a certain level of confidence, the web data on those exchanges would be in the range of non-high deviations from the standard index range.
Although there are some errors due to the web structural characteristics of each exchange and the specificity of the users who mainly use the exchanges, the exchanges with reliability were in the standard trust score range.
In addition, the top 10 exchanges, which account for the top volume reported in the general cryptocurrency statistics services, found higher error rates (Trust Score) than the categories in the standard index.
We conducted further verification of the error rate of a selected exchange through API analysis reported by the exchange.
- Bid spread value of $10.2. Slow and regular time period of the closing history.
- Bid spread value of $2.2. Fast and irregular time period of the closing history.
Most exchanges with high error rates showed high bid spread values, slow closing, and repeated & periodic patterns, and in the similar range of Trust Score.
Based on the above methodology, we generated a Web Traffic-based algorithm and applied it to the entire exchanges to calibrate market indicators. This corrected a lot of data.
Correcting Distorted Cryptocurrency Market Indicators
Corrected Indicator as follows
- Correction of each exchange’s volume
- Correction of each cryptocurrency’s volume
- Correction of cryptocurrency market’s volume
Correction of Exchange rankings
Based on the algorithm above, we calibrated the exchange rankings, and the overall exchange rankings have changed significantly.
As we are aware, Binance and Bitmex have ranked top, and traditionally well-known and reliable exchanges have been at the top. In addition, highly recognized exchanges in each country ranked high.
Correction of Cryptocurrency Trading Volume
To date, cryptocurrency trading volumes have been published as manipulated volumes, and the volume of certain cryptocurrencies might seem quite high. Now Comaps reports all metrics as calibrated metrics.
Exchange rating, trust rating, volume rating
We used the above data to produce a trust score for each exchange, based on volume data which we adjusted. Based on this, the credit rating of the exchange was given, and the volume rating was assigned according to the corrected trade volume.
The ratings of each exchange were assigned by displaying the confidence rating and the volume rating together. Ratings make it easier for users to see the reliability and size of their exchanges.
Limitations of Web Traffic Based Market Indicators
Web traffic-based market indicators have some limitations. First, since the Web Traffic indicator is difficult to collect daily indicators, there is a limit to tracking the total market volume more precisely.
Secondly, the average transaction price per traffic of the population standardizes the entire cryptocurrency market volume, which does not reflect the diversity of cryptocurrency investor sentiment by country and exchange.
We will try to overcome the above limitations and further refine the standard index by diversifying population settings by country and by type of exchange, and by shortening the collection cycle for Web Traffic indicators.
However, despite the above limitations, we believe that the cryptocurrency market indicators we have produced filter the distorted fake data to a high level and provide the indicators closest to the actual market indicators
Conclusion
We have revised the volume of cryptocurrency market with the above methodology. The result was outstanding. The daily trading volume reported at the time of measurement was $ 44.3 billion, but the revised trading volume was corrected to $ 4.4 billion, resulting in a reduction of approximately 90%. The daily trading volume of the top global financial exchanges in 2018 ranges from 0.25% to 1.28% of the market cap, with a global average of 0.51%.
After implementing our methodology, 2019 Q3 cryptocurrency daily transactions ranged from $4 billion to $7 billion, forming a 1.7% to 3.4% level, which looks rather high, but the results are in the right range given 24/7 daily trading.
Our methodology is not the way to completely screen out real volume. However, we believe that liquidity can be estimated by the closest number in the environment of an unregulated cryptocurrency exchange. Comaps will continue its efforts to further refine measurement methods and tools.
Website: https://comaps.io
Telegram: t.me/comaps
