The Affection of Liquidity Ranking by CoinMarketCap — What do we think of it?

Dec 9, 2019 · 6 min read

CoinMarketCap launched its new ranking by liquidity metric on November 12th, using a new evaluation method to capture liquidity data from 53 exchanges. The emergence of liquidity ranking will have a far-reaching impact on the ecosystem of the current industry and the competition pattern of exchanges, which will be briefly analyzed in this article.

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01. Why Liquidity is so crucial?

Liquidity is one of the key impact factors whether market participants can easily enter or exit the market. Investopedia defines liquidity as: “ Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. “ So, the main criterion to judge liquidity is not “Can I sell it? “ but “ Can you sell it at or near the final price?” Liquidity is especially important as slippage can occur when a large order is executed.

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The figure above shows the real-time data of two trading platforms at a point in time (exchange A on the left and exchange B on the right). In the list of BTC/USDT deals to be traded on exchange A, the price gaps among the listed orders are small, while the amount of listed orders is large. However, the situation in exchange B is vice versa. Price gaps among the listed orders in exchange B are large while the amount of orders is quite small. Obviously, the trading depth of exchange A is much better than exchange B. When market participants trade on the platform with a better trading depth, it can not only ensure a stable price but also facilitate buying and selling deals.

Jack Yang, Partner of TokenInsight, thinks that:

02. How to Measure the Liquidity of Exchanges?

For a market participant, the basis of choosing an exchange is formulating investment strategies and investment decision makings. Market participants generally need to pay attention to liquidity, safety, convenience, and other factors when choosing an exchange, while liquidity is the main difference among current exchanges.

Liquidity is measured mainly by the ease of buying and selling deals. An exchange with plenty of liquidity can guarantee that underlying assets can be bought and sold at a modest discount. At present, the indexes to measure liquidity on the market mainly include the trading volume, transaction volume, market depth, tightness degree of quotation, slippage, etc.

The trading volume provided by the traditional financial market exchanges is reliable. Liquidity is generally measured directly by trading volume, transaction volume and turnover rate.

In token market, however, the trading volume is quite different. TokenInsight recorded transactions at 24 major exchanges between 0:01 on September 3rd, 2019, and 22:35 on September 21st, 2019, UTC+8. We found out that 83.3% of the trading volume in the general token market is fake, while the real trading volume of 8 exchanges is less than 8%. The real trading volume in the market is far less than the public perception. To measure the liquidity of exchanges, a direct ranking of 24-hour volume may have obvious flaws that do not reflect the ease of trading.

Possible reasons to cause the flaw are:

(1) Since there is no direct tax on the transaction of general securities, the transaction owner attracts customers to trade through brushing volume, and there is basically no cost to pay.

(2) The ranking of exchanges previously launched by trading data websites like CoinMarketCap, Feixiaohao is mainly based on trading volume, resulting in strong incentives for exchanges to improve their ranking by wash trading.

(3) Due to the lack of supervision, the credibility of the open trading volume is low, and the situation of artificially high trading volume widely exists.

03. Ranking by Liquidity Launched by CoinMarketCap

CoinMarketCap recently launched a real-time “Liquidity Ranking” of exchanges. The ranking adjusts the weight of each trade based on three variables to measure the liquidity of exchanges on the latest 24-hour. The three key variables are as follows:

(1) The distance between the order price and the middle price: the farther the gap between order price and the middle price, the lower the weight of the order should be.

(2) Order size: the market liquidity scores higher as the order amount in the order book get larger.

(3) Relative liquidity of relevant assets: different weights are assigned to different cryptographic assets. The more liquid the currency pair is, the further away the order quotation is from the middle price, the faster the weight of the order decreases. This can give higher weight to orders that are more likely to be executed because they are more important to market traders.

The weight of each variable depends on its role in determining liquidity, and CoinMarketCap does not disclose a formula for calculating liquidity. The ranking considers the market depth and bid-ask spreads, allowing for partial fixes to 24-hour trading volume flaws.

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FIG. 3–1 and FIG. 3–2 show the liquidity ranking and 24-hour trading volume ranking of exchanges at a certain time on the CoinMarketCap website on November 25, 2019. The comparison of the two rankings also shows that the liquidity ranking is more consistent with the perception of ordinary participants on the trading conditions of each exchange.

04. The Impact of “Liquidity Ranking” to Exchanges

CoinMarketCap’s “Liquidity Ranking” is a better indicator of exchange liquidity than a traditional 24-hour ranking. As the market becomes more concerned about exchange liquidity and “Liquidity Ranking”, the ranking will have a profound impact on the market ecosystem. The main performance of that is in the following aspects:

(1) Exchanges’ fraudulent trading behavior (wash trading) is expected to be curbed. The amount of brushing cannot bring about the promotion in liquidity ranking, and it may also become a data fraud that affects their credibility.

(2) Superior market makers will become a cause of intense competition among exchanges. Since introducing more and better market makers is the fastest way to improve the liquidity ranking in CoinMarketCap in a short term, excellent market making teams will become the target of competition among exchanges in the future, and the market-making business will welcome a good opportunity for development.

(3) Platforms providing liquidity services for customers such as aggregation platforms and dark pools will rise rapidly. Because of the limited depth and liquidity of individual exchanges, aggregation platforms or dark pools can provide customers with several times the depth and liquidity of a single exchange for making large transactions.

About TokenInsight

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Founded in 2017, TokenInsight is a Leading Data & Tech Driven Blockchain Financial Institution. TokenInsight pioneered a complete blockchain industry classification system, covering more than 1,600 projects, releasing more than 300 rating reports, and conducting in-depth studies into 10 major industries.

TokenInsight’s data, ratings, and research reports have access to more than 70 data platforms worldwide, including Messari, Delta, Binance Info, AICoin, Huobi Info, etc., with a monthly PV of over 30 million. TokenInsight has officially joined the Data Accountability and Transparency Alliance (DATA), initiated by cryptocurrency ranking site CoinMarketCap.

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