Liquidity Score
Key Takeaways
Scancoinz’s new Liquidity Score rates all crypto markets on a scale from 0 to 1,000, with 1,000 representing the most liquid markets and 0 the least liquid. The Liquidity Score allows users to quickly compare liquidity across different markets. Markets with higher Liquidity Scores experience less slippage, resulting in lower unexpected transaction costs.
Purpose of the Liquidity Score ("formerly Liquidity Metric")
Scancoinz tracks cryptocurrency assets and their corresponding market pairs across multiple exchanges worldwide. This wealth of data can overwhelm users when choosing the right exchanges and market pairs for their transactions.
The Liquidity Score was designed to address these concerns and underscore the significance of understanding market liquidity. Liquidity refers to the ease with which one asset can be exchanged for another (e.g., selling Bitcoin for USD or vice versa). Liquid markets offer the least slippage (the difference between expected and actual prices), while illiquid markets can result in higher slippage, leading to increased transaction costs. For a simplified explanation of liquidity, slippage, and why they matter, please refer to this blog post.
Changes to the Liquidity Score
We’ve made several improvements to the Liquidity Score to make it clearer and to better reflect an exchange’s liquidity. To better understand the rationale behind the updates, read this blog post.
Simplified Liquidity Score
The Liquidity Score is now represented by a single number ranging from 0 to 1,000, with 1,000 indicating the most liquid markets and 0 the least liquid. This enables easy comparison across all markets: the higher the score, the more liquid the market, and the lower the score, the less liquid the market.
Focused on Relevant Orders
In the previous version (Liquidity Metric), we prioritized the depth of the order book (order sizes). Larger orders in the book suggested higher liquidity. However, we realized that orders above a certain size are often irrelevant to most users. For instance, a typical crypto investor would not trade in 50 BTC orders (worth over $300,000), making that data unnecessary.
The new Liquidity Score prioritizes tracking slippage for order sizes ranging from $100 to $10,000, with larger orders (up to $200,000) still tracked but given less weight.
Emphasis on Slippage
The key feature of liquid markets is minimizing slippage—the difference between the expected price and the price at which a trade is executed. Liquid markets allow users to trade assets with minimal impact on the price, saving on transaction costs.
The Liquidity Score for each market pair is based on how much slippage would occur for a range of orders if executed immediately, with particular focus on orders between $100 and $10,000.
How to Interpret the Liquidity Score
We track slippage in both buy (bid) and sell (ask) orders, as markets must have sufficient orders on both sides of the order book to minimize slippage. The more buy and sell orders there are, the less slippage occurs, making trades more predictable.
A perfect Liquidity Score of 1,000 means minimal slippage for orders up to $200,000. A score of 0 indicates a highly illiquid market, with fewer than $100 in total value on either the buy or sell side. Traders should exercise caution in such markets.
The 0–1,000 score scale helps users quickly identify liquid or illiquid markets without having to manually inspect order books. We hope this enables more informed decision-making when choosing exchanges for transactions.
The Methodology Behind Liquidity Score
Three key factors are used to calculate the Liquidity Score:
- A range of order sizes relevant to retail traders (~$100 to ~$200,000)
- The depth of the order book for the market pair
- The slippage of the order sizes when submitted into the order book
We simulate an immediate market buy and sell for each of these order sizes, measuring the slippage—defined as the difference between the expected and the actual price. The slippage for all tested order sizes is then combined to form the Liquidity Score.
Frequently Asked Questions
What do the Liquidity Scores represent?
The Liquidity Score helps users compare the liquidity of different markets using a single number. It simplifies the process of manually comparing order books or applying fixed liquidity parameters.
Why is liquidity important for crypto traders?
Liquidity matters because it directly impacts the price you get when you trade. Liquid markets have many participants, allowing for better prices and minimizing slippage.
Should I always choose the most liquid exchanges?
While liquidity is important, it’s not the only factor to consider. Read our "Bonus Insights" blog post for more context.
Why is XYZ exchange/market pair scored high, and should I trust it?
The Liquidity Score is based on a quantitative analysis of the order books, tracked via APIs from exchanges. It is not a measure of trustworthiness, but of liquidity.
How do I interpret the scores?
The scores are not linear, so while a score of 500 indicates higher liquidity than 250, it doesn’t mean it’s exactly "twice as liquid." More details will be provided in the future to offer a better comparative overview of scores.
Should I still care about the Volume metric?
Liquidity Scores and volume are different metrics. While they can be related, they track distinct aspects of market activity. However, we are improving the Adjusted Volume metric to incorporate liquidity data in the future.
How often are Liquidity Scores updated?
Liquidity Scores are updated every two hours, based on data from exchanges’ APIs.
Liquidity Score (Exchange)
Scancoinz ranks exchanges based on the Liquidity Scores of their trading pairs. The scores displayed reflect the average of the top 25 trading pairs, excluding stablecoin pairs. This helps prioritize exchanges with the most liquid markets, which are more beneficial to traders.
This revised version maintains the original structure and meaning while incorporating the requested changes. Let me know if further adjustments are needed!