Trading volume has long been the default metric cited by analysts, media pundits, and aggregators to classify cryptocurrency exchanges. Although volume provides a general overview of market activity, it can be falsified to make it appear that more legitimate activity is occurring. trade activity in a market than there actually is.
The exchange may simply print non-existent trades or trick customers into engaging in fictitious trades (placing buy and sell orders of the same size at the same price that instantly cancel each other out, creating trading volume additional which adds nothing). real liquidity). Volume can be misused as a vanity metric that does not offer a meaningful indicator of the experience expected of a legitimate trader.
Liquidity: the lifeblood of any successful market
Think of liquidity as the speed and ease with which orders are executed without impacting the spot price of an asset. As a metric, it tells participants how easy it is to execute trades at or near the current market price.
Of the different market health metrics Kraken monitors, we use six to track trade liquidity:
Spread
THE difference in price between the highest bid (the price a buyer is willing to pay) and the lowest ask (the price a seller is willing to accept). Tighter spreads enable better trading because they mean a lower cost of trading (beyond fees) and represent better consensus on the current market value of an asset.
Depth
The relative size and number of bids and asks open at any time. Market depth means new orders can be executed more easily, reducing the impact on the trading price.
Stability of the order book
THE The degree of market depth varies over a period of time, but particularly so in distressed market conditions. High order book stability means that orders have a consistent level of market impact. This is especially important when volatility is high.
Supply/demand imbalance
THE comparative size of bids and asks at a given depth. Imbalances (e.g., bids much larger than asks) create directionally unstable liquidity, leaving asset prices susceptible to high volatility in one direction.
Latent liquidity
THE cost of market orders measured by taker fees. Setting taker fees at the right level ensures that market orders can be placed at the optimal opportunity cost.
Price dispersion
The speed at which exchanges update market prices compared to other exchanges. Minimal price dispersion means traders can act quickly on new price information.
The real impact of liquidity on exchanges
High liquidity saves time and money. Like a real physical market, transactions happen quickly and seamlessly if there are many buyers and sellers. On the other hand, illiquid markets incur an opportunity cost: trades take longer to complete and are executed at less favorable prices.
As a result, liquidity also encourages trading activity… which leads to more order flow… which creates even more liquidity: a virtuous cycle. Low liquidity can create higher execution risk which discourages clients from trading on the platform, further reducing liquidity.
Liquidity communicates important information that volume does not communicate
As a metric, liquidity reflects the quality of the trading experience: it is self-evident to the client whether a market is liquid or not. If exchanges were ranked based on their liquidity, there would be no benefit to sites printing fake trades or tricking customers into washing trades.
There would be no point in artificially inflating nominal volumes. The focus would be on aligning incentives between the exchange and the end user.
Think of liquidity as synonymous with market resilience. In an illiquid market, orders have a significant impact on prices, discouraging legitimate trading activities. Illiquidity also provides bad actors with the opportunity to manipulate prices with large volume orders around a price depth or level.
Regulators have previously expressed concern that cryptocurrency prices are too easily influenced by whales. In a liquid market, large orders are more easily absorbed, thus avoiding market disruptive effects.
Focusing on liquidity rather than trading volume would directly incentivize exchanges to provide a better, convenient trading experience in order to attract new customers. Broader awareness of these dynamics will produce a healthy, thriving ecosystem and markets that customers can navigate confidently and efficiently.
These materials are intended for general information purposes only and do not constitute investment advice or a recommendation or solicitation to buy, sell, stake or hold any crypto-asset or to engage in any trading strategy. specific trading. Kraken does not and will not endeavor to increase or decrease the price of any particular cryptoasset it makes available. Some crypto products and markets are unregulated and you may not be protected by government compensation and/or regulatory protection programs. The unpredictable nature of crypto-asset markets can result in losses of funds. Tax may be payable on any returns and/or increases in the value of your cryptoassets and you should seek independent advice on your tax situation. Geographic restrictions may apply.