What is order book liquidity? How can you compare liquidity data from major exchanges through TokenInsight?
This article will tell you what order book liquidity is and how to compare liquidity data from major exchanges through TokenInsight.
What is the liquidity of financial assets?
In finance, the liquidity of an asset refers to the ease of converting the asset into cash and the degree of impact on the market price. The more liquid an asset is, the easier it is to convert it into cash and the less the impact on the market price. For example, stocks are easier to convert into cash than houses, so stocks are more liquid.
From a price point of view, more liquid assets can convert to greater amounts of cash without affecting the market price. In other words, exchanging the same amount of assets into cash, the less impact on the market price, the better the liquidity of the particular asset. For example, if you market sell $1 million of Bitcoin, the price of Bitcoin will not fluctuate much. But if you market sell $1 million of an altcoin, you may half its price.
How can we measure the liquidity of crypto assets on exchanges?
For decentralized exchanges, the larger the trading pool, the better the liquidity. For example, on Uniswap V2, the USDC/ETH pair has a TVL of $269 million, much larger than DAI/USDC's $62 million. Therefore, the liquidity of USDC/ETH is much better than that of DAI/USDC.
To learn more, check out What is DEX Liquidity and LP (Pool)
Centralized exchanges use the order book model. That is, users trade by placing and executing orders.
For example, the red box above means that one or more traders want to sell 2.16230 bitcoins at $29,520. The same is true for the green box, except it is a buy order. The price of any asset is determined by supply and demand. When buy orders increase, it will cause the price to rise.
We can measure an exchange's liquidity by its order book size. The more pending orders, the better the liquidity.
Compare Liquidity on Centralized Exchanges
It is good practice to check for liquidity before trading on centralized exchanges and pick the most liquid exchange to get the best execution price. Although Binance is the most popular, there are better choices when trading specific cryptocurrencies.
You can compare the liquidity situation of different exchanges in real-time on the exchange liquidity interface of TokenInsight.
The URL address is: https://tokeninsight.com/en/dashboard/market-liquidity/aggregated-orderbook
We chose the 1% price range for comparison for our exchange liquidity data.
So what does this 1% price range mean? Suppose the price of Bitcoin is $ 30,000. To calculate the depth of sell orders, we add up all the orders from the current price up to 1% above the current price, aggregating all sell orders between $$30,000 and $$ 30,300.
The same goes for buy orders, aggregating all buy orders between $29,700 and $30,000 to get the buy order depth in the 1% price range.
Adding the two together, we get the 1% market depth of Bitcoin.
The chart below is a 1% market depth chart for XRP.
The more the buy and sell orders (the higher the bars of green and red), the deeper this coin's market depth.
It is worth noting that any depth is for a single trading pair. For example, BTC-USDT and BTC-USDC are separate trading pairs with distinct liquidity (market depth). Of course, after calculating the depths of multiple trading pairs, we can sum it up or take an average to measure the liquidity of a particular coin on an exchange.
How do we calculate exchange liquidity?
We chose the most liquid trading pair of the same coin on different exchanges for our liquidity data to calculate its liquidity. The specific trading pair selection for each coin is shown below:
The order book changes in real-time. Thus, we obtain the order book data from the above exchanges every hour, 24 times a day, and each time, we calculate the market depth within the 1% price range.
At TokenInsight, you can get the buy and sell depth data of major trading pairs of any cryptocurrency on any exchange at any time, accurate to the hourly level.
How can you use market-depth data?
Aggregation Depth Chart
This chart aggregates the market depths of the same coin on different exchanges.
Let's use Bitcoin as an example. There are three sets of data available in the chart:
- The depth of the sell orders (red)
- The depth of the buy orders (green)
- The price of Bitcoin (orange)
When the red area becomes larger, the sell order volume of Bitcoin increases; when the green area increases, the buy order depth increases. The collision of buying and selling depths will affect the Bitcoin price. If the red and green areas are far apart, the depth of the market is poor, which often occurs before and after Bitcoin price fluctuations.
You can choose USD or a cryptocurrency as the unit of measurement in the top right. In addition, the waterfall chart can be changed to a difference chart, as shown below:
After switching to "difference" in the upper right corner, the data set changes from three (sell order depth, buy order depth, Bitcoin price) to two (buy order and sell order depth difference, Bitcoin price). When the difference is positive, the bar is green, which means that the buy order depth of Bitcoin is thicker than the sell order depth; otherwise, it is red, which means the sell order depth is thicker than the sell order depth.
Why is the price falling when the chart shows green bars most of the time?
The order book's liquidity does not determine the price. Other factors that affect price include:
- Many buy or sell orders are directly traded at the market price, resulting in price changes, and the market order does not appear in advance in the order book data, so it is not reflected in the chart.
- Orders pile up a little further away from the market price, causing the depth of the market to look thick, but there is no actual transaction.
- Data is collected once an hour, so data capture is delayed and is not entirely real-time.
Exchange Market Depth Comparison
Exchange market depth comparison chart compares the liquidity across exchanges. Each set of data (each line) represents the depth change of an exchange. There are four ways to compare:
- Buy + Sell: sum of buy and sell order depth
- Buy - Sell: the difference between the depth of buy order and sell order
- Buy order: only includes data for buy orders
- Sell order: only includes data for sell orders
- Why use 1% price range?
For liquid assets like Bitcoin and Ethereum, many orders are in the order book, especially those close to the current price. However, the order book data provided by exchanges is a fixed number of orders, which means that orders whose prices deviate more from the current price are excluded.
Second, orders only make sense when they are closer to the current price, and orders that deviate too much from the current price do not affect actual liquidity.
For Bitcoin and Ethereum, we use 1% price range depth; we may add 0.5% or 2% price range depth data later.
- Why collect data every hour?
As mentioned earlier, the order book data changes in real-time. In theory, if you want to fully reflect the changes in the order book, the best way is to maintain a real-time order book database. However, our charts aim to compare the depth difference between exchanges and observe the liquidity changes over a more extended period. Collecting data samples every hour is good enough for such purposes.
Of course, increasing the frequency, such as once every half hour, can improve accuracy. However, we found after testing that higher frequency does not necessarily enhance the analysis of the data itself
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