Study Emphasizing the liquidity of Most Major Cryptocurrency
March 21, 2018 3:04 pm
A Study conducted to test liquidity of Cryptocurrencies and Digital assets
Sylvian Ribes, a cryptocurrency dealer, investigated into the compendium of small-scale cryptocurrencies and found out that OKEx which is the fourth largest cryptocurrency trading platform in the world, is mostly aerated.
Ribes initially conducted a study on the liquidity of digital assets and cryptocurrencies by using a method named “slippage” which tests the order book of each cryptocurrency trading pair. The liquidity was tested by selling aid worth $50,000 across various exchanges.
Liquidity basically indicated the rise or drop of particular cryptocurrencies on a certain exchange platform. Ribes experimented with this method to test the liquidity of cryptocurrencies on OKEx, Bitfinex, Kraken, and GDAX.
Influenced by OKCoin, formerly the largest cryptocurrency exchange in China before the local government’s crackdown on trading, Hong Kong-based OKEx momentarily became the biggest cryptocurrency exchange internationally, as reported by Cointelegraph, overtaking Binance in March 2018. At the time of reporting, OKEx prevails among the four largest trading platforms, alongside Binance, Huobi, and Bitfinex.
Bitfinex, Kraken, and GDAX have regulated cryptocurrency exchanges that allow cryptocurrency-to-fiat trading. GDAX was established and is currently being operated by Coinbase, which has more than 20 mln users and is the most popularly used Bitcoin wallet. Kraken is based in San Francisco, while Bitfinex is based in Hong Kong, beside OKEx and Huobi.
According to the chart below, Kraken and GDAX, which are mostly used by users to process cryptocurrency-to-fiat trades, deposits, and withdrawals, registered the smallest slippages, signaling that the two exchanges have enough liquidity to deal with relatively massive sell-offs, in the range of $50,000 to $100,000.
Nevertheless, the rate of slippage on OKEx, seemingly one of the largest cryptocurrency exchanges in the world, was considerably higher than that of the three fiat-processing cryptocurrency exchanges.
Large slippage, guidance possible
On GDAX, a sell-off of $50,000 worth of a particular cryptocurrency only led to slippage of around 0.1 percent, as seen on the blue dots on the chart above. However, $50,000 sell offs on OKEx led to massive slippages, as the value of cryptocurrencies fell and order books became dizzy.
On a blog post detailing his findings, Ribes stated that the research has shown how the volumes of OKEx and other cryptocurrency-only exchanges are assembled and exaggerated, given that a small number of sell orders can manipulate the order books and prices of cryptocurrencies.
“The chart is striking. It shows how, although all first three exchanges seem to behave rather similarly, OKex pairs, in red, all have a massively higher slippage with regards to their volume. Like I explained before, this can only mean that most of the volume OKex claims are completely fabricated.”
Moreover, Ribes revealed that the chart above excluded slippages of over 4 percent. The chart provided by Ribes below, which includes slippages of more than 4 percent, show the shallow order books and low liquidity of OKEx.
Mt. Gox and other factors influencing BTC price
On March 7, 2018, cryptocurrency analysts including Alistair Milne stated that the sell-off of hundreds of millions of dollars in Bitcoin had led the price of the cryptocurrency to crash down to $8,300. Cointelegraph released an in-depth analysis of the matter, scrutinizing the impact Mt. Gox bitcoin sell-off had on the market over the past few weeks and its constant effect on the entire cryptocurrency market.
Despite the large amount of Bitcoin he holds, Mt. Gox trustee Nobuaki Kobayashi dumped tens of thousands of dollars in Bitcoin in the public market, on cryptocurrency exchanges rather than over-the-counter (OTC) markets. The sudden sell-off of nearly 32,000 Bitcoin led to a domino effect across all major cryptocurrency exchanges, and the price of Bitcoin fell as it created frenzy within the public market.
Apparently, the Bitcoin market was not singularly influenced by the sell-off of Mt. Gox Bitcoins. It was a blend of many factors including the US government’s attention on initial coin offerings (ICOs), cynical mainstream media coverage about traditional finance experts denouncing the cryptocurrency market, and fear, uncertainty, and doubt from Japan. The mixture of these factors in addition to lack of momentum led the price of Bitcoin to decline.
Easy to collapse volumes and price
In illiquid markets and trading platforms with inflated volumes, it is relatively easy to manipulate the price of small cryptocurrencies. While it takes many major constituents and a questionable correlation of events to bring down the price of primary cryptocurrencies like Bitcoin and Ethereum, Ribes’ research illustrates that a similar result can be accomplished in a market with small cryptocurrencies with capital in the range of $50,000 to $100,000.
Ribes moreover stressed that illiquid pairs did not just include small cryptocurrencies, but trading pairs of major cryptocurrencies like NEO and IOTA which possess market caps of over $3 bln can slip by more than 10 percent merely with a sale of $50,000.
“Many pairs, albeit owning up to $5 mln volumes, would cost you more than 10 percent in slippage, should you want to reimburse a mere $50,000 in assets. Those pairs involved, at the time of the data parsing (March 6, 2018): NEO/BTC, IOTA/USD, QTUM/USD. Hardly illiquid or low-profile assets.”
Changpeng Zhao, the CEO at Binance, the world’s largest cryptocurrency exchange, stated that the research of Ribes is a “good in-depth analysis” of the cryptocurrency market.
The cryptocurrency industry is still at its early stage, and digital assets remain highly volatile. Inflated and fabricated trading volumes on major cryptocurrency exchanges need to be highlighted and acknowledged, to obtain a better visualization of actual liquidity within the cryptocurrency market.