Why Liquidity Matters

Crypto Integrity
Jan 31, 2019 · 7 min read

When one chooses a broker or an exchange, one usually pays due attention to the fee level. However, when choosing a right investment, especially in the crypto economy, people often forget about the liquidity of an asset, although it may have even more negative impact on the overall performance of the investment than the fees paid.

What is liquidity?

As Investopedia says,

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

How can it be measured? Here, we will mention a few metrics that are used by the investing community, although the terms may vary:

  • bid-ask spread
  • 10 BTC liquidity
  • handy liquidity

(Have a look at this paper to learn more about liquidity metrics and their application to European ETF market and at the methodology of MSCI Market Indexes, which is also worth reading.)

One of the popular visual tools that help you understand the liquidity of an asset is the chart of the order book depth. You have probably seen it on almost all websites of cryptoexchanges.

The chart shows that the more one wants to buy, the higher (weighted average) price one needs to pay. The rationale behind it is simple. There are more people willing to sell at higher prices than at current ones. The opposite is also true — the more one wants to sell, the lower WA price one finally gets.

Another comment on the chart above — there is a huge buy order of more than 50 BTC at around $3,462. The best bid and ask were $3,461.99 to $3,462 at that moment. It means if you want to buy ₿50, you will be able to buy at $3,462. However, if you want to sell ₿50, your order will trigger many trades of different price, so that the last bitcoin will be bought at around $3,450. As a result, the weighted average price will be, say, $3,455, which is lower than the displayed mid-market price of $3,461.995 by 0.2%.

Bid-ask spread

In Coinbase Pro case, the spread for the transaction of such a size is comparable to the trading fees paid by a taker. For smaller sizes, of course, the bid-ask spread is narrower and can be as low as the minimum price step of 1 cent (see the picture below).

Let’s review other two popular exchanges — BitStamp and Binance.

The summary of the comparison among the exchanges (based on snapshots!) is presented in the table below. As one may see, the best bid - best ask spread is negligent on Coinbase Pro; BitStamp and Binance are comparable with the spread on BitStamp being 2 times better (narrower). All in all, the bid-ask spread for bitcoin in major exchanges is comparable with the trading fees, thus, must not be neglected.

As bitcoin is the most liquid cryptocurrency, the spreads in other crypto assets are wider, as expected. The table below shows the best bid-ask spreads for top-10 crypto assets by market cap. Bid-ask spreads are calculated for the supported exchanges in accordance with the methodology, which can be found here.

The general tendency is that higher market capitalisation means narrower bid-ask spread. However, the truth is it is not always the case. The liquidity of less popular crypto assets may not depend on the market capitalisation. Investors should pay attention to this fact and be cautious about their potential investment decisions.

What does the bid-ask spread of 5% mean? If one wants to buy at market an asset XXX for $100 and if the price does not change at all, one will have to sell XXX for $95, not taking into account exchange fees. In other words, XXX must appreciate by at least 5% before an investor will be able to sell it without a loss.

10 BTC liquidity and Handy liquidity

However, let’s have a thorough look at the order books. How many bitcoins can one buy at best offer or sell at best bid prices? Let’s consider a purchase of 3 BTC. Unfortunately, for the observed exchanges, the spreads will be wider by 4–700% than the best bid-ask spreads.

We suggest two useful real-time tools to measure liquidity — 10 BTC liquidity and Handy liquidity. It is also important to collect some historical data to make inferences based on statistics rather than snapshots.

10 BTC liquidity is the ratio of best bid-ask spread by 10 BTC (or equivalent for other currencies) to the bid-ask spread, i.e., it says by how many times the spread by 10 BTC is wider than the bid-ask spread. The lower the ratio, the more liquidity around the current bid-ask, the better the price a buyer or seller may get.

Handy liquidity is the cumulative volume (estimated in BTC) in an order book at levels remote from the mid-market price by <0.5%. More liquid assets have higher handy liquidity. For professional investors who want to purchase (and after a while sell) a considerable amount of a crypto asset, it is an important part of investment analysis. The table below shows that there is no direct relationship between the market capitalisation of an asset and its Handy liquidity. If we take bitcoin’s ratio of Handy liquidity to the market cap as a benchmark, we will see that Ripple, Bitcoin Cash and Bitcoin SV has very low relative Handy liquidity, while the data for Tether, EOS and Litecoin shows the opposite.

Otherwise stated, if an investor (a) wants to buy a considerable size of an asset, (b) is ready to pay the price, which is by <0.5% worse than the current mid-market, and (с) base his/her investment decision making only on Handy liquidity, he/she will go for EOS and Litecoin (as a stable coin, Tether is rather unattractive investment, from the expected return point of view).

For the less liquid assets, the picture confirms the lack of the relationship between the market cap and Handy liquidity. Surprisingly, Maker, which is the top-25 coin, has 0 Handy liquidity. Zero value means that the best bid-ask spread is wider than 0.5%.


When planning a future purchase, an investor must consider the underlying liquidity among other characteristics of an asset. Liquidity defines not only the final price, which an investor will pay but also the selling price. Even for retail investors, it is important to analyse the depth of the order book around the mid-market in addition to the bid-ask spread.

In crypto markets, higher market capitalisation not always means higher liquidity and narrower spreads. The markets are still unregulated and not transparent, thus, the market price may not reflect the fundamental value of an asset. Generally speaking, liquidity is a derivative from the supply and demand interest presented in an order book. Thus, the underlying liquidity is one of the parameters that help an investor to estimate the true value of an investment.

P.S. All pictures, prices and values of indicators have been captured at the time of writing the article (10-Dec-2018); the calculations are based on charts if not stated otherwise. In addition, please note that the charts and tables above are snapshots of the current state of the market. To get the more realistic estimation of bid-ask spreads and other metrics, one needs to gather data for some period (say, a day or a month) and analyse a distribution of the outcomes to calculate the mean and median values.


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