The crypto community is grudgingly adjusting to a new measurement metric, one that many critics have demanded for some time, but, perhaps, not in its present form. There has always been a problem in the way that volumes are reported and aggregated by large data collection firms like CoinMarketCap.com (CMC). This particular aggregator is also the leader in the industry, and, as such, has been the focal point for cries of foul play and “fake volumes”. It has now, after many months of development and testing, instituted its new “Liquidity Metric” for ranking programs and exchanges.
As we reported in early September:
CMC has come under a great deal of criticism for not applying some type of screening process to eliminate “fake” volume within the system. Over the past year, several crypto data analysis firms have published reports, citing serious problems with volume overstatements, due to wash trading, robot trades, and other techniques employed to inflate volumes. Exchanges often live or die by their volume rankings, since they impact listing fee revenue and the attraction of new clients.
Carylyne Chan, Chief Strategy Officer of CoinMarketCap, as reported by CryptoBriefing, hopes the new changes will address volume issues:
We hope to provide public good to the crypto markets by encouraging the provision of liquidity instead of the inflation of volumes… With cryptocurrency, it’s more difficult to detect wash trading. Our thoughts are that liquidity is really the most important metric for traders. And so, the new metric is a way for us to help our users to find the best markets to get the best prices.
Although CMC received its share of criticism for not screening the volumes reported to it, there was no easy way of accomplishing this corrective process. The new Liquidity metric is more a process than a focus on a single data statistic. The CMC servers actually poll exchanges on a random basis, taking into account time zone changes and the spacing of active trading over a 24-hour period. The next step is to take an inventory of the open order book, perform data comparisons to average spreads at that moment in time, and then, based on internal algorithms, calculate a measure of liquidity.
Details of how liquidity is calculated is provided on the CMC website, but Chan adds this bit of explanation:
For one thing, an order that deviates significantly from the average price on a marketplace is likely to be placed by the exchange operator itself to boost volumes and thereby will be given lesser weighting when producing the Liquidity scoring. Our new metric will focus on what matters most to investors and traders: liquidity. With this metric, our users will be able to find the most liquid market for more than 3000 crypto assets, so that they can trade even more efficiently, with the least slippage.
As expected, a major re-ordering of exchange rankings has occurred after the new metric was installed. Binance is now the “Number One” exchange, but respectable exchanges like Coinbase and Huobi are now in the Top Ten. The “losers” in the new ranking game are many of the exchanges that have come under fire for inflating their volume data. Firms like CoinBene, CoinEx, and MXC have been demoted down to much lower levels. Whether or not there is a direct correlation, Bitwise Asset Management had produced reports that purported that 95% of system-wide volumes were fake.
As the industry tries to digest this new way of looking at its participants, one major point has come to light, a severe lack of liquidity. AMBcrypto reports that:
The 54 exchanges listed by the platform on its liquidity index page accounted for a total of only $350 million. It was reported that if all other exchanges were involved, the liquidity valuation may go up to as high as $500 million. This means that from a total market cap of over $240 billion for the entire crypto-market, liquidation was achieved for only about $400-$500 million, which is an estimated 0.2 percent of the entire market cap.
Analysts estimate that “a mere dump of 1000-5000 BTC could cause a major market crash for the digital assets ecosystem”. What about other altcoins? Willy Woo, a partner at Adaptive Capital, believes that 4,938 out of the 4,978 tokens on CoinMarketCap are illiquid. Woo explains to CCN:
Those who are looking to invest in any of the 4,938 illiquid cryptocurrencies have a 5% chance of getting a return on their investments.”
Woo is not the first one to suggest that 99% of altcoin programs could fail.
In the meantime, we wait to see how the industry reacts to these new rankings and disclosures. Critics of “fake volume” have also warned that, without regulatory oversight, offending exchanges and token program managers will find new ways to game the system. Chan responds:
We believe our adaptive methodology will make our metric very difficult to ‘game’ as orders would need to be placed close to the mid-price, or risk being counter-productive to the Liquidity metric scoring.