1. What do the Liquidity Scores represent?
The Liquidity Score allows users to compare the difference in liquidity of different markets by looking at a single number. This is in contrast to having to either manually compare order books of different exchanges (which can be quite tedious); or to compare liquidities using fixed parameters defined (for example, a ± 1% on the order book depth).
Reporting liquidity requires us to show order sizes on the bids and asks, and the slippage incurred by orders of a certain quantity. Instead of showing multiple numbers that may confuse users, we decided to simplify everything by performing all the calculations internally and surfacing a single number that reflects the liquidity of markets.
2. Why should I care about liquidity as a crypto investor/trader?
For more information on why liquidity and slippage matters to you, refer to this blog post.
In short, liquidity matters whenever you trade in markets. When you buy or sell in a market, the final price you receive is dependent on the other traders in the market willing to trade with you. A liquid market has many participants competing to give better prices. Hence, trading in a liquid market allows you to get the best prices for your buy or sell orders.
That is why liquidity matters, and we hope Liquidity Scores can help you achieve that objective!
3. Does this mean that I should ALWAYS choose the top liquid exchanges to trade in?
While having liquid markets is a good criteria for shortlisting exchanges, it is not the only factor that an investor/trader should consider. Please read the “Bonus Insights” on this blog post for more information.
4. Why is XYZ exchange/market pair scored so high? I do not trust them!
Liquidity Score is calculated by tracking the order book depths of all exchanges via their APIs (or what the exchanges submit to us). The scores are a purely quantitative measure of liquidity of an exchange or market pair.
Please refer to Question 3 above for more insights on how to shortlist exchanges. In the near future, we will introduce better ways on CoinMarketCap for you to shortlist exchanges to trade on.
5. How should I interpret the scores? If Exchange A has a Liquidity Score of 500, and Exchange B has a Liquidity Score of 250, does this mean Exchange A has twice the liquidity of Exchange B?
The scores are calculated by an algorithm which looks at the order books of every single market pair and simulates orders being sent into the book. The slippage of the orders sent are then tallied up and a score is produced.
As discussed in Question 1, there are many different ways to “report” liquidity. We have chosen to use a scoring system to better reflect liquidity in a manner that impacts users the most. However, this also means that the scores are not “linear” in nature. While we can say that a “500” point market is more liquid than a “250” point market, we cannot say that it is “twice as liquid”.
We will be releasing more information and data with regards to how the scores are distributed across exchanges and market pairs in future, which should give a better comparative overview of the scoring system.
6. With Liquidity Scores, should I still care about the Volume metric listed on the site?
Liquidity Scores and volumes are entirely different concepts – one measures liquidity of markets, the other tracks the amount of assets that changes hands.
However, they are correlated to a certain degree. A highly liquid market can imply a high volume market as traders usually prefer to trade in exchanges that have a high amount of counterparties as that reduces the slippage on their trades.
We are constantly improving the Adjusted Volume metric on CoinMarketCap, which will also take the liquidity of markets into account. In the future, that should help you to know, at a glance, how to better shortlist exchanges to trade on.