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How to measure liquidity?

There are a number of factors to look at when considering liquidity, but it’s useful to remember its practical context: the exchange on which it is traded. When trying to understand the liquidity of a specific asset, it can be helpful to look at numbers such as 24-hour trade volume on a site like CoinMarketCap, but this data is limited.

To measure liquidity in a practical way to help determine where and what to trade, you need to begin at the exchange level, as not all have equal trade volumes. When evaluating an exchange for liquidity, you can look at its 24-hour trading volume, its order book depth (the number of open buy and sell orders), and the bid-ask spread. When evaluating the order book, however, it’s important to remember that stop-limit orders, which execute when price is at or better than a target price, and iceberg orders, which are large orders broken in to small chunks to obscure the total value, are not always visible, meaning it might not be a fully accurate representation.

It’s also worth noting that CoinMarketCap recently released a new metric called “Exchange Liquidity,” which is aimed at reducing the influence of inflated volume metrics and calculated by a “range of key variables from the order book, such as the distance of the order from the mid-price, the size of the order and the relative liquidity of the asset in question.” This will likely prove a valuable metric for traders hoping to get an accurate representation of exchange liquidity.

Data Science PR

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