Introducing LTP Liquidity Score: A liquidity calculation method based on order book depth
Report Summary
In the trading world, liquidity issues are crucial for any type of investor, trader or exchange. This report aims to introduce and analyze the liquidity changes of various currencies in centralized cryptocurrency exchanges based on the order book depth data, and then deduce the change trend of the overall liquidity of the exchange for investors' reference.
As a leading prime brokerage service provider in the cryptocurrency industry, LTP uses an independently developed liquidity scoring method to comprehensively evaluate the liquidity performance of exchanges. By comparing the order book depth data of more than 13 cryptocurrency pairs on 12 major exchanges for more than 6 months, this report draws the following main conclusions:
The top four exchanges with the best liquidity are Binance, Kraken, Coinbase, and OKX, and their rankings can remain relatively stable over an observation period of more than 6 months.
Since March 2024, the liquidity performance of Gate and KuCoin has shown a gradual increase, while the liquidity of Bitfinex has shown a higher volatility.
Bitcoin Liquidity Performance: With only a 0.1% price range, Binance’s liquidity performance always remains at the forefront. Once the price range exceeds 0.3%, Binance’s Bitcoin trading pair liquidity becomes more volatile, while Kraken’s liquidity performance is relatively high.
Ethereum Liquidity Performance: Compared to Bitcoin, Ethereum’s liquidity across all exchanges is more volatile across the five price range levels. In contrast, Binance’s Ethereum liquidity score only becomes more stable when the price range exceeds 0.3%.
By observing the LTP liquidity index, the overall market LLI liquidity index rose steadily from January to June 2024, and five liquidity peaks occurred. The first three occurred in March, when the Bitcoin price broke through the previous high, and the last two occurred in early June.
A brief introduction to the concept of liquidity
What does liquidity mean in finance?
In financial markets, liquidity refers to the ease with which an asset or security can be converted into cash without a significant impact on its price.
“Without significantly affecting its price” means:
The smaller the impact a transaction has on market prices, the more liquid the asset is.
The greater the impact a transaction has on market prices, the less liquid the asset.
for example:
Scenario 1: Alice purchases $100,000 of asset A causing the price to increase by 1%.
Scenario 2: Bob purchases $100,000 of asset B causing the price to rise by 2%.
In both cases, we can see that asset A is more liquid than asset B. This is because for the same investment amount, the price of asset A increases less, which means that the amount of investment has less impact on the market price, and therefore is more liquid.
The “ease of conversion to cash” indicates:
The easier it is to convert an asset into cash, the more liquid the asset is.
The more difficult it is to convert an asset into cash, the less liquid the asset is.
For example, in general:
Gold is easier to sell into legal tender than real estate, which means that gold can be converted into cash more quickly and easily.
Therefore, gold has better liquidity than real estate.
Crypto Exchange Liquidity
Liquidity on Centralized Exchanges (CEX)
Source: binance.com
In the crypto industry, almost every centralized exchange uses an order book to list all pending orders.
Generally speaking, the more buy and sell orders included in the order book, the better the liquidity of the trading asset.
Source: binance.com
The above image is a snapshot of the depth view of the Bitcoin order book. With sell orders on the left and sell orders on the right, investors can view the total number of Bitcoins available for buyers and sellers within a specific price range. As shown in the figure, the 0.1% price range shows that there are 50 and 72 Bitcoins available for buyers and sellers, respectively.
By comparing the depth of the order books, both in terms of Bitcoin and USD, investors can identify which exchange offers the best liquidity.
Schematic diagram of the liquidity score calculation methodology
Liquidity on decentralized exchanges (DEX)
Decentralized exchanges (DEXs), as the backbone protocols and liquidity foundation of the decentralized finance (DeFi) track, rely on a trading mechanism called automated market makers (AMMs).
Due to the limited settlement speed of Ethereum, most DEXs do not rely on traditional buy and sell orders, so there is no need for an order book, which is different from traditional exchanges. DEX traders trade directly with the liquidity pool composed of two tokens*. The price of each token in the pool is determined by a fixed mathematical formula. The most classic DEX Uniswap uses the formula of constant product: x * y = k, that is, in the absence of new liquidity, no matter how users trade, the product of the two currencies in the pool remains unchanged.
In DEX, there is a role of liquidity provider (LP), who is responsible for providing two currencies in the pool for trading at the same time, thereby earning fees. As the popularity of the currency increases, there will be more incentives for LP, more tokens will be added to the pool, the total locked amount TVL will also increase, and the liquidity of the pool will increase.
Source: https://info.uniswap.org/
Tokens with higher total locked value (TVL) in the liquidity pool have better liquidity on decentralized exchanges.
LTP Liquidity Score
What is LTP Liquidity Score?
In order to solve the problem of exchange wash volume causing trading volume to not accurately reflect liquidity conditions, LTP independently developed a novel exchange ranking method, which relies entirely on the analysis of objective order book data without considering subjective or Other confusing factors. Order book data provides valuable insights into exchange trading activity, market depth and participant behavior. This alternative ranking method is not intended to replace existing volume-based rankings, but rather serves as a complementary tool. By examining order book data, we can better understand liquidity differences across exchanges and use liquidity as a metric to evaluate exchange performance. In the following report, we try to:
Explain the methodology used to calculate the liquidity score.
Compare the liquidity and ranking of 12 centralized exchanges.
Analyze liquidity data of mainstream high-trading volume tokens.
Introduce and explain what the LTP liquidity index is.
How is the exchange liquidity score calculated?
Collect order book snapshot data: Get order book data for the same base token trading pair from different exchanges. For example, BTCUSDT from Binance, BTC-USD from Coinbase, XBTUSD from Kraken, and tBTCUSD from Bitfinex. This data will include the buy and sell prices and corresponding quantities at each price level.
Calculate the depth of a price range: Determine the depth of the order book at a specific price range level. For example, calculate the depth of the 0.1%, 0.2%, 0.3%, 0.4% and 0.5% price ranges. This requires summing the number of orders within a specific percentage of the market price.
Calculate the liquidity score for each trading pair: Compare the depth of different trading pairs at each price range. Calculate the liquidity score of each trading pair based on the relative depth. The greater the depth, the higher the liquidity score.
Aggregate Liquidity Score: Combines the liquidity scores for each trading pair at different price ranges (e.g., 0.1% to 0.5%). A weighted average score is calculated by assigning appropriate weights to each level of price range and liquidity.
Calculate liquidity scores for multiple pairs: Extend the same approach to calculate liquidity scores for more pairs and different base tokens. Collect order book data for the required pairs and repeat steps 2 to 4.
Calculating exchange-by-exchange liquidity scores: Finally, an overall exchange liquidity score is calculated by aggregating all the different trading pairs for each exchange. The liquidity score is weighted based on the 24-hour trading volume of each trading pair. Trading pairs with higher trading volume will have a greater impact on the overall exchange liquidity score.
On the next page, we have illustrated the above process with a diagram. If you are interested in a detailed explanation of the methodology, please visit: Exchange Liquidity Ranking Methodology.
Choice of currency and trading pair
For spot trading, an exchange provides trading options for multiple currencies, and for the same base currency, it generally also provides trading options for multiple quote currencies. Therefore, the liquidity of an exchange is very decentralized.
To get a more realistic analysis of an exchange’s liquidity, we first examine its most liquid trading pairs.
Ideally, all trading pairs should be considered, but due to specific constraints, we select a limited number of trading pairs that account for more than 70% of the total trading volume.
When comparing exchanges, we target trading pairs with the same base coin (e.g., BTC-USDT vs. BTC-USD).
We first analyze the order book data of selected trading pairs. The score of a trading pair is calculated by comparing different trading pairs with the same base currency within the same exchange.
The exchange's overall liquidity score is based on the volume-weighted trading pair score.
Exchange Liquidity Ranking
Exchange Liquidity Score
As the world's largest centralized crypto exchange, Binance remains the most liquid market, with an average liquidity score of 95.99 over the past six months, with only a large fluctuation in early March. Kraken is second, and now ranks second in liquidity with an average score of 86.85.
The top four exchanges with the best liquidity are Binance, Kraken, Coinbase, and OKX, and their rankings have remained relatively stable over time.
Source: LTP Research
Source: LTP Research
Among the remaining 6 exchanges, Gate.io currently ranks 7th with an average score of 71.87. Gate.io's liquidity score trend has risen significantly since March 20, exceeding 80 points for a period of one month before falling back. Bitfinex follows closely behind, with the highest volatility among all exchanges.
From the trend, the liquidity performance of Gate and KuCoin has gradually improved since March 2024. There is no obvious change in Phemex, Huobi, Crypto.com and Coinex.
Source: LTP Research
Source: LTP Research
Currency liquidity
Bitcoin Liquidity
Source: LTP Research
By aggregating Bitcoin order books from 12 centralized exchanges and categorizing them into buy and sell orders, we observed the order book depth performance of Bitcoin within five price ranges from 0.1% to 0.5%.
To increase the granularity, we selected the deep change data of Bitcoin within 30 hours between June 11 and 12, 2024.
It is not difficult to see that within the 0.1% price range, the average Bitcoin depth does not exceed $50 million. At the 0.3% level, it only reaches $100 million. The difference between the 0.4% and 0.5% ranges is not much.
Liquidity ranking of various exchanges in the Bitcoin market
Source: LTP Research
Binance is the exchange with the highest liquidity in Bitcoin trading orders. Especially near the order book that is very close to the market price, Binance's liquidity performance is very stable and always ranks first. From this perspective, for retail traders, orders can always be completed at the best price on Binance.
However, when considering orders that are further from the market price, Binance’s advantage is not so clear. In the price range of a few hundred pips, OKX and Kraken often occupy the first position.
When the price range extends to 0.4%, Kraken can maintain the first position most of the time. Kraken's ability to rank first in such a price range is mainly closely related to its ability to provide free Bitcoin transaction fees.
Ethereum Liquidity
Source: LTP Research
Similar to Bitcoin, the data on the left captures the deep changes of Ethereum ETH within 30 hours from June 11 to 12, 2024.
The depth distribution of non-ETH is more concentrated at the 0.3% to 0.4% level. At the 0.1% level, the depth is below $25 million; at the 0.3% level, the depth is over $50 million; at the 0.4% level, the depth is over $75 million. However, there is no significant increase at the 0.5% level.
According to the data during this period, the buy and sell orders of Ethereum ETH always maintain a 1:1 ratio.
Ethereum market liquidity rankings of various exchanges
Source: LTP Research
Ethereum ETH liquidity changes are more volatile than BTC across 12 exchanges. Although Binance still ranks first, its score has fluctuated by more than 50% in the observed 30-hour period.
In particular, during the early morning hours of June 11, all but 0.5% of the price range had a liquidity score of 75 or less. It was not until after 6 a.m. that Binance and other exchanges showed improvement.
OKX and Bybit have the potential to catch up with Binance in terms of Ethereum ETH liquidity performance. Especially in the 0.1% price range, their liquidity scores are very close to Binance.
LTP Liquidity Index LLI
What is the LTP Liquidity Index?
The LTP Liquidity Index is an indicator that measures the overall liquidity of the cryptocurrency market. It is derived from the BTC and ETH weighted order book depth data of the three major centralized exchanges, Binance, Coinbase, and Kraken. It intuitively helps investors understand how the overall market liquidity changes over time and with changes in BTC prices. Next, let's take a look at the basic principles of the LTP Liquidity Index.
How is the LTP Liquidity Index (LLI) calculated?
We extract buy and sell order depth data from the BTC order books of Binance, Coinbase, and Kraken, and divide the depth into five price intervals, from 0.1% to 0.5%. Then, we calculate the total depth of each price interval.
We then assign weights to each price range: 0.1% for 30%, 0.2% for 25%, 0.3% for 20%, 0.4% for 15%, and 0.5% for 10%.
We use these weights to calculate the weighted depth of each exchange by price range on a daily basis. We then add the weighted depths of the three exchanges together to get the daily weighted depth of BTC.
We set the depth data of the starting day as the base value of 1,000. By comparing the remaining depth data with the starting day data, we start changing from 1,000 points based on the percentage, and then get the BTC liquidity index.
Using the same method, we calculate the liquidity index of ETH. Next, we combine the BTC liquidity index and the ETH liquidity index, with BTC accounting for 75% of the weight and ETH accounting for 25% of the weight, to obtain the LTP liquidity index.
Currently, the LTP liquidity index only introduces two mainstream crypto assets, BTC and ETH, as targets. In the future, more Crypto targets will be introduced based on market value and will be equipped with corresponding weights.
LTP Liquidity Index (LLI)
Source: LTP Research
The chart above shows the relationship between the LTP Liquidity Index (LLI) and Bitcoin price from January 2024 to mid-June 2024, based on hourly changes.
As you can see from the chart, over the past six months, the liquidity index has gradually increased from its starting point of 1,000 points with a standard deviation of about 250 points.
As of June 13, 2024, the liquidity index has risen to 1,748 points. During the Bitcoin historical high (ATH), there were several outliers exceeding 3,000 points, which indicates that market liquidity has surged in the short term and is an important signal for price increases. It is worth noting that this signal also appeared in early June.
BTC Liquidity Index
When we check the liquidity index of BTC alone, we can see that the two liquidity peaks mentioned above in March and June both came from BTC, with peaks close to 4,000 points.
On the contrary, BTC liquidity has only experienced two significant downward spikes in this range, occurring in mid-April and late May.
Source: LTP Research
Source: LTP Research
Bitcoin Order Book Depth Data
Source: LTP Research
This chart shows BTC order book layer depth data across three exchanges.
Although the actual calculation divides the BTC order book depth data into five levels (0-0.1%, 0.1%-0.2%, 0.2%-0.3%, 0.3%-0.4%, 0.4%-0.5%), for the sake of clarity, the figure only shows the first three levels.
It is not difficult to see that the liquidity peak of Bitcoin in March mainly appeared in the range of 0.2%-0.3%.
ETH Liquidity Index
As for Ethereum’s ETH liquidity index, it peaked over 3,000 points only once during its all-time high in mid-March, and there was no such peak in June. Instead, the ETH liquidity index fell below 500 points at three points: once before the March peak, once in mid-April, and once after the Ethereum ETF was approved in late May.
Source: LTP Research
Source: LTP Research
Bitcoin Order Book Depth Data
Source: LTP Research
This chart shows the depth data of the ETH order book tiers of the three exchanges Binance, Kraken, and Coinbase.
Likewise, although the actual calculation divides the ETH order book depth data into five tiers, the chart only shows the first three tiers, i.e. 0 -0.1% up to 0.2%-0.3%.
It is clear that the three liquidity troughs in the past six months have all occurred in the 0.2%-0.3% range. Each time liquidity has dropped sharply, overall liquidity levels have fallen below $10 million.
Summarize
We started with the basic concept of liquidity, introducing investors to liquidity in traditional finance and how to understand it. Next, we explained how the order book depth of cryptocurrency exchanges affects liquidity and briefly introduced the concept of liquidity in decentralized exchanges.
We then introduced how LTP uses the depth data of different price ranges in the exchange order books to calculate the LTP liquidity score for each exchange and cryptocurrency. After obtaining long-term data, we ranked the liquidity of the 12 targeted centralized exchanges.
From the liquidity score data, we can see that the top four exchanges with the best liquidity are Binance, Kraken, Coinbase and OKX, and their ranking can remain relatively stable during the observation period of more than 6 months. Since March 2024, the liquidity performance of Gate and KuCoin has gradually increased. Bitfinex's liquidity shows a higher volatility.
Furthermore, we compared the liquidity performance of BTC and ETH trading pairs across various exchanges over a period of approximately six months and observed that Binance did not always remain at the top.
With only a 0.1% price range, Binance’s liquidity performance always remains at the forefront. Once the price range exceeds 0.3%, Binance’s Bitcoin trading pair liquidity becomes more volatile, while Kraken’s liquidity performance is relatively high.
Finally, to assess the volatility of overall market liquidity, we introduced the LTP liquidity index. We observed a gradual upward trend in market liquidity over the past six months.
It should be noted that the raw data for this report comes from the public exchange order book API, and we only used the main trading pairs of 12 major exchanges, so the coverage is not comprehensive. In future versions, we will include more trading pairs to make the scores and indices more effective.
