Today, money is the most liquid asset. If a transaction of $1 million takes place in the real world, the market absorbs it easily without the value of the currency drastically changing. However, if the transaction takes place in BTC or any other cryptocurrency, it has an enormous effect on the cryptocurrency’s value. This is because the markets lack liquidity.
Why does it matter: historical cases
Take, for example, the cases of Viacoin (VIA) and Syscoin (SYS) which occurred on Binance on March 7 and July 3 respectively. While the former experienced 10,000% pump, the latter experienced an even more epic rise. Someone managed to sell 11 SYS for 96 BTC for around $635,000 per token, while minutes before they were worth about 0.00004 BTC (~ $0.27). Both stories turned out to be possible due to the low liquidity of the coins. Preceding the incidents, the 24h trade volume for VIA was about 11 BTC, while SYS was about 75 BTC. Thus, malefactors easily cleared thin orderbooks and fulfilled their high sell orders. When one sold high then someone bought at high prices and lost money. Therefore, high liquidity is important for safe and efficient trading.
That’s why CER considers liquidity of exchanges when compiling ratings because to complete the same transaction of $1 million, it could end up costing between $10,000 and $100,000 more than the original price to make the trade.
How is the Liquidity Score estimated?
Liquidity Score (LS) is a rating of exchanges based on parameters defining their liquidity. A LS is comprised of six subtotals: spread, spread volatility, trade volume, trade volume volatility, book depth (orderbook volume), and book depth volatility. Each component is calculated by our proprietary elaborate formulas (algorithms).
The following table shows heat mapped Liquidity Scores (from red – the lowest values, to green – the highest values) for all exchanges covered by CER for each day of the last week together with their corresponding trends.
Table 2 pictures daily changes of LS for all exchanges over the week, as well as each venue’s LS volatility for the week.
Volatile vs. Consistent Liquidity
As we can see from Table 1 and Table 2, some exchanges have a more consistent and some have a more volatile LS compared to competitors.
Bitmex exchange has the least volatile LS over the week with the standard deviation of 0.08, meaning it has the most stable liquidity among its peers.
The sharpest daily drop in liquidity was on Kraken – minus 1.23 points or 20.36%, thus making it the most volatile crypto exchange by liquidity during the week and the most unreliable exchange in terms of liquidity stability with the standard deviation of 0.40. It is worth noting that none of the exchanges, covered by CER, showed stable growth during the week.
The sharpest daily rise was by Korbit exchange on September 9, adding 0.78 points, thereby becoming the leader in our LS rank on September 9 (rising 4 positions in 1 day). On the other hand, the highest percentage growth was by Kucoin exchange on the previous day, when it rose by 15.05%.
Only 5 exchanges (Kucoin, Hitbtc, Exmo, Bitstamp, and Bitmex) show positive weekly dynamics, while others have clear downward trends. Bittrex experienced the biggest weekly LS decline, falling –16.31%. Kucoin performed the largest biggest weekly rise in LS, growing by 11.13%.
TOP-3 Exchanges by LS
The following table shows LS’s and their component values for the Top-3 exchanges of CER LS rank.Coinone ranks #1 in LS with 6.22 points stemming from the best spread as well as solid spread volatility, volume, and book depth values. Korbit comes in the second place with 6.20 points, falling behind the leader by a spread (8.12 vs 10 points) and volume volatility (3.74 vs 4.42 points). Coinbase finishes in third place with 6.14 points. It is worth noting that the divide between the 3rd and the 4th (Binance) exchanges is significant (0.33 points) according to the last day of analysis.
Graph 1 displays LS weekly dynamics for Top-3 exchanges.
As we can see from the chart figuring LS trends of TOP-3 Exchanges, Coinone’s LS fluctuates insignificantly through the week (volatility ratio is 0.12), while Korbit and Coinbase experience greater LS variation (volatility ratios are 0.25 and 0.19 respectively). This means that Coinone has more consistent liquidity (comparing to peers,) making it more attractive for trading. In contrast, the high volatility in liquidity of Korbit and Coinbase makes trading with larger volumes on the platforms riskier. All the Top exchanges show the negative weekly trend. The leaders’ daily average drop in liquidity is -0.79% for Coinone, -0.28% for Korbit, and -0.26% for Coinbase.
BOTTOM-3 Exchanges by LS
The following table shows LS’s and its components’ values for Bottom-3 exchanges of CER LS rank.Bittrex was the worst performer by Liquidity Score with 3.49 points due to weak values in 4 out of 6 LS components. Like the CER LS #1 loser, Cex.io and Exmo also have weak values in 4 out of 6 LS components. As a result, the week of September 7-13, 2018 shows Cex.io in 17th place and Exmo on 16th place respectively. During the week these exchanges were the lowest on CER LS rating. For six consecutive days, Cex.io exchange held steadily in last (18th) place. However, on September 13, Bittrex demonstrated a sharp drop (-19.77%, the second sharpest drop after that of Kraken) finishing last due to its low liquidity.
Graph 2 displayed LS weekly dynamics for Bottom-3 exchanges.
The chart above figures LS trends of the Bottom three exchanges. Thus, we can see that Bittrex`s LS has a significant fluctuation (especially on the last day of this week), while Exmo and Cex.io have smoother LS trends moving in opposite directions (Bittrex`s volatility score is 0.32 compared to 0.12 for Exmo and Cex.io). Although Cex.io has the lowest liquidity during the week (except for September 12), its values show more consistency over time, making trading reasonably safer. In contradiction, the volatile liquidity of Bittrex should caution traders while trading on the platform. The losers daily average drop in liquidity is -2.72% for Bittrex and -0.20% for Cex.io. In contrast to them, Exmo shows a positive trend with +0.63% daily average rise in liquidity, reducing the distance from Poloniex exchange to 0.05 points.
To sum up
The Liquidity Score by CER provides a complex valuation of crypto exchanges based on their liquidity metrics. It’s an extremely valuable measurement, since the more sufficient and consistent the liquidity an exchange has, the more enticing it is for high volume traders and investors.
Coinone leads our LS rank with 6.22 points on September 13, with an average LS of 6.38 during the September 7-13 week.
Largest increase from the beginning of the week – Kucoin (+11.13%).
Largest decrease from the beginning of the week – Bittrex (-16.31%).
Largest daily LS increase – Kucoin (+15.05% on September 8).
Largest daily LS decrease – Kraken (-20.36% on September 13).
Most unstable (volatile) exchange – Kraken.
Most stable exchange – Bitmex.
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