Liquidity Score (Market Pair, Exchange) – CoinMarketCap

Liquidity Score (Market Pair)

Key Takeaways

The new Liquidity Score by CoinMarketCap grades all crypto markets with a score from 0 - 1,000, with 1,000 reflecting the most liquid of markets and 0 for the most illiquid.
With the Liquidity Score, users can now easily understand and compare the difference in liquidity across different markets.
Users can expect less slippage on markets with higher Liquidity Scores, thereby incurring less unexpected transaction costs.

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:

A range of different order sizes that are most relevant to retail traders (~$100 to ~$200,000);
The order book depth of the specific market pair;
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.

FAQ on Liquidity Score (Market Pairs)

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.

7. How often are the Liquidity Scores refreshed?

We will refresh the Liquidity Scores every 2 hours, subject to the availability of order book data received from the exchanges' API.

Liquidity Score (Exchange)

CoinMarketCap ranks exchanges via the Liquidity Scores attributed to the trading pairs of the exchange.

The scores shown reflect the average of the Top 25 Trading Pairs listed on the exchange.

These Trading Pairs do not include stablecoin/stablecoin pairs.

An average of the Top 25 Trading Pairs is used as simply summing up the Liquidity Scores of all exchanges would unfairly favour exchanges that have a lot of trading pairs. We wanted to prioritize exchanges that have good liquidity amongst the top trading pairs as those exchanges would serve the needs of our users best.

FAQ on Liquidity Score (Exchanges)

1. What is “Avg. Liquidity” for Exchanges?

Tracking the “liquidity” of an exchange poses an interesting problem. We have previously described the problems of reporting liquidity of a market pair, and exchanges are essentially made up of multiple markets. As we have moved towards a scoring system for reporting liquidity of market pairs, a mere summation of these scores might lead to an unintended skew of the results.

Exchanges with a high number of market pairs will be scored higher than those with lesser markets – simply by having more markets.

In order to better showcase liquidity of exchanges and ranking them as such, we decided to take the Average Score of the most liquid market pairs of exchanges, excluding any stablecoin/stablecoin pairs. Hence, the top exchanges on this list would have:

High liquidity in their most active markets
A good number of liquid market pairs, which will be great for traders and investors that are interested in a variety of tokens.

2. Why is XYZ exchange scored so high? I do not trust them!

In ranking exchanges, we take an average of the most liquid market pairs of and exchange and display that (as described in Question 1). 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.

3. With Liquidity Scores, should I still care about the Volume metric of exchanges?

Liquidity Scores and volumes are entirely different concepts – one measures liquidity of markets, the other tracks the amount of assets that changes hands.

We understand that there has been some concern around the volume inflation of some exchanges in recent times.

We are rolling out a new Adjusted Volume ranking on CoinMarketCap shortly that will address this concern directly, so stay tuned.