Liquidity Score (Methodology)

Key Takeaways

Purpose of the Liquidity Score (“formerly Liquidity Metric”)

CoinMarketCap tracks cryptoassets and their corresponding market pairs across multiple exchanges worldwide. This information can be overwhelming for our users when they are deciding which exchanges and market pairs are best for them to transact on.

We have designed our Liquidity Score to address these concerns and highlight the importance of understanding liquidity in markets. Liquidity refers to the ease of buying or selling one asset for another - for example, selling Bitcoin for USD or vice versa. When executing trades, the most liquid markets have the least slippage (i.e. when the price you expected and the price you actually got are different). Less slippage effectively means that you are saving money on transaction costs, while more slippage in an illiquid market will cost you more money.

For a simple guide on liquidity, slippage and why it matters to you, read this blog post.

Changes to the Liquidity Score

We made several changes in the design of the Liquidity Score to make it more understandable and to more accurately reflect an exchange’s liquidity. To understand more about the rationale behind the changes below, read this blog post.

     1. Liquidity Score is now just one number ranging from 0 – 1,000

We simplified the score shown to a number between 0 to 1,000, with 1,000 reflecting the most liquid of markets and 0 as the most illiquid. This allows every user to compare all markets easily. The higher the score, the more liquid a market is. The lower the score, the less liquid the market is.

     2. Liquidity Score now tracks and prioritizes orders that are most relevant to our users

In our previous iteration, called the Liquidity Metric, we focused on the depth of the order book (i.e. the order sizes). The larger the orders in the order book, the more liquid a market is deemed to be. However, we have realized that orders beyond a certain size are not relevant to a majority of our users. For example, an average crypto investor will not be trading in 50 BTC orders (which easily can be more than $300,000) and hence won’t need that information.

In the new Liquidity Score, we focused on tracking the slippage of order sizes that matter most to our users, prioritizing the slippage of orders in the range of $100 to $10,000. Larger order sizes up to $200,000 are still tracked, but with a much lower weight attributed to them.

     3. Liquidity Score emphasizes the importance of monitoring slippage

A crucial function of liquid markets is to reduce the slippage (i.e. difference between asking and selling price) that is incurred while trading. In liquid markets, one is able to trade in and out of an asset cheaply without fear that the order would adversely affect the execution price.

CoinMarketCap’s Liquidity Score for every single market pair is based on how much slippage a trader would incur on a range of orders if the trades were executed immediately. With the majority of our user base in mind, orders between $100 and $10,000 will be prioritized.

How to Interpret the Liquidity Score

We track slippage both ways, on the buy (bid) and sell (ask) orders, as markets need to have sufficient orders on both sides of the order book. The more buy and sell orders there are, the more likely that traders are able to transact at their expected prices. This will effectively keep slippage to a minimum. 

• A perfect Liquidity Score of 1,000 means that the market has a very low slippage for orders up to $200,000 in size. 
• The lowest Liquidity Score of 0 means that the order books have less than $100 in total value on either the buy or sell side — a very illiquid market! Be very careful when trading on markets with low scores!

Having a simple 0 - 1,000 score helps users quickly identify liquid and illiquid markets without having to browse through the order books manually. We hope this allows our users to make better decisions on which venues are the best to transact in.

The Methodology Behind Liquidity Score

Three key factors go into calculating CoinMarketCap’s Liquidity Score:

1. A range of different order sizes that are most relevant to retail traders (~$100 to ~$200,000);
2. The order book depth of the specific market pair;
3. The slippage of the different order sizes in (a) when sent into the order book (b).

In (1), we pick a handful of different order sizes ranging from $100 - $200,000. The order quantities are spread fairly over the entire range and reflect sizes that are most commonly used by traders.

For each of these different order sizes, we simulate an immediate market buy and sell order, tracking the resulting slippage. As stated earlier, slippage is defined as the distance between the price that the trader wanted versus the price at which the order was eventually bought or sold. The lower the slippage, the higher the score.

The slippage of the entire range of tested orders is calculated collectively to form the resulting Liquidity Score.