Here Is How Market Liquidity Is A Better Way Of Ranking Cryptocurrencies Than Market Capitalization

August 3, 2018

 

Ranking cryptocurrencies based on their market capitalization does not do justice to the popular coins that are moving huge volumes per day through trading. Market cap is simply a product of the circulating supply of a coin and its current value. This means that a lot of other statistical data is left out including a coin’s market liquidity. The latter is defined as the extent to which the crypto market, allows assets to be bought and sold at stable prices. This then brings us to the concept of trade volume. If a coin is experiencing high trade volume, this demonstrates investor interest in the underlying project represented by the digital asset. Conversely, if a digital asset has a low trade volume, there is not much interest in the project. The coin might have a high market cap but there aren’t actually many sellers and buyers, just a large percentage of holders.

With the assumption that trading volume acts as a proxy for market interest, we thought it would be an interesting exercise to test whether strong positive and negative outliers could be found when comparing a coin’s market capitalization with its 30-day trading volume.

The base hypothesis is that if a coin trades more of its market cap in volume, it’s a sign of a lively marketplace and high interest in the coin. Such markets allow for the quick purchase and sale of assets by individual firms without causing a drastic change in the asset’s price. However, if a coin’s trade volume is a small percentage of its market cap, it’s far more prone to intense fluctuation as there are often not enough buyers or sellers to cover major market moves. A better illustration of this can be found in the following infographic:

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