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CoinMarketCap has rolled out a new cryptocurrency exchange tool that tracks the liquidity of exchange platforms to help tackle the issue of fake trading volumes reported by some exchanges.
Traditionally, an exchange's relative size is calculated by looking at the reported daily trade volume, but that figure can be manipulated through tactics such as wash trading to make an exchange appear larger than it really is. CoinMarketCap's alternative is attempting to provide a more accurate picture of an exchange's health.
The Liquidity metric tool scans around 3,000 cryptocurrency pairs from the 50 top exchanges every 24 hours, looking at things like order-book depth, price distance from mid-price–a measurement that compares the asking price and the best price of a stock or commodity–and order sizes to give a more accurate picture of the asset's market.
"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," said Carylyne Chan, the chief strategy officer (CSO) at CoinMarketCap.
The move comes following widescale reports by various news outlets that some exchanges were found to be manipulating the perceived daily trading volume for Bitcoin and a variety of other digital assets. A report from Bitwise recently stated that nearly 95% of all crypto trades were 'wash trades' and were becoming a significant barrier to knowing the real price of an asset. "When people are inflating their volumes, they are basically inserting orders into the order book, so they buy and sell to themselves. What we are trying to do here is to counter that," said Chan.
The shift away from volume-based ranking for cryptocurrencies is expected to provide a better representation of the asset's acceptance viability and also helps pinpoint exchanges that are reporting inflated volumes.
Within 24 hours of the new feature implementation, Coinbene, a Singapore based exchange was leading the market in terms of liquidity. However, Binance has now secured the top spot and is followed by HitBTC and Huobi Global.
Similarly, while the top five largest exchanges by trade volume appear to be Bilaxy, CoinBene, CoinEx, BKEX, and Bibox, these are much further down the list in terms of actual liquidity—indicating that their trade volume is mostly artificial. Nonetheless, it remains to be seen whether the new liquidity tool will be as resistant to gaming as CoinMarketCap hopes.
The release of CoinMarketCap's new Liquidity metric was first announced at The Capital, an event that the company is currently hosting in Singapore as a part of Singapore's Blockchain Week. The event is being hosted at the same time as the Singapore FinTech Festival which was organized by the Monetary Authority of Singapore (MAS).