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By: Anthony Mandelli

 

Crypto markets are reaching the levels not seen since ATHs achieved in 2017 when projects were raising hundreds of millions of dollars through their ICOs. Many cryptocurrency traders are looking at the exciting price action across the industry and seeking out new markets to open positions. During the assessment of possible opportunities, it’s important to not only attempt to evaluate a project’s fundamentals but also consider the marketplaces where the asset trades. When gauging the maturity of a market, traders need to factor in two important benchmark metrics - liquidity and trade volume.

 

 

What is market liquidity?

A simple way to understand liquidity is that it is the ability for a trader to trade in a market when they want without impacting the market price.  An order book’s liquidity is the cumulative total of traders expressing their appetite to buy an asset and sell it at different levels away from the spot price.

 

As it pertains to cryptocurrency trading, “liquidity” is often an indicator of how easy one token can be exchanged for notional fiat value or another token. A more accurate way to think of it is an asset’s ability to be sold without impacting the market price or value at that time. “Deep liquidity” refers to the depth of an order book, which is a list of willing buyers and sellers of an asset at a given price. The deeper the liquidity, the more buy and sell orders exist for the trading pair.

 

Finding deep liquidity

Markets with deep liquidity, also called “highly liquid,” have large quantities of buy and sell orders, allowing investors to make substantial trades within a given percentage of the spot price (the spread). In illiquid markets, it’s difficult to build or exit positions without impacting the asset’s market price.

Using AscendEX’s ETH/USDT order book as an example, users can see buy and sell orders listed next to a dynamic feed of settled trades.

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Deep liquidity is characterized by the presence of many layers of maker orders on both the buy and sell sides; traders can see open orders across the spread as they are entered, and CoinGecko shows over $430,000 in open orders +2% of the spot price and over $240,000 -2% (shown below).

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Deconstructing trade volume

While trade volume alone is not enough to signify a healthy market, consistently high activity in a market is often a strong signal of trading interest. There are two key factors to consider when you want to evaluate a market’s trade volume:

 

  1. 24-hour notional volume
  2. Volume juxtaposed against periods of volatility

 

The AscendEX XTZ/USDT pair saw roughly 780,000 XTZ traded in the 24-hour period between November 22nd and 23rd. For traders with positions across multiple assets, it is more efficient to use the 24-hour notional volume: $2,080,278 for this pair over the 24-hour period. Typically denoted in USD / RMB /CNY (or the trader’s native fiat currency), notional trade volume can be a useful standardized way to compare different trading assets against one another.

 

Another way to glean insight from looking at trade volume is to compare it with volatility.

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Though these two metrics might not be completely correlated, an asset experiencing price fluctuations that in turn drive increased trading activity can be a strong signal of robust market conditions.

 

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