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Quantitative Metrics

Liquidity and Tradability

Some of the most important metrics include liquidity and tradability. Liquidity is an asset’s ability to be quickly converted into cash with ease. In the cryptocurrency market, liquidity is how easily a digital asset could be bought or sold without a large impact on its price. In other words, the greater the liquidity, the more stable the digital asset’s price.

Liquidity is of the utmost importance for any tradable asset. If you are a long and illiquid cryptocurrency, there could be a slew of problems - one of them being not being able to exit at a favorable price. If the markets are deep and smooth, traders are able to get out easier. In other words, you want to see cryptocurrencies with a tight bid-ask spread, as well as buyers and sellers on both sides.

If demand is much greater than the supply, there could be a larger spread because there would be increased volatility in the ask price. If you are trying to purchase a digital asset, this is a tough situation, especially if you want in. For example, if there’s huge demand for a digital asset, say Gladius, but no supply, you may not be able to buy at a price near the bid.

Think about it like this - imagine someone wants to purchase a rare Picasso painting. Let’s assume the owner is only willing to sell the painting for $10M while the buyer is only willing to pay $1M. Moreover, assume the buyer and seller are the only two parties interested in this painting. The market is very illiquid, and therefore, there’s a wide spread between the bid and ask prices.

Getting back to the cryptocurrency world.

One way to measure liquidity is by examining average daily trading volumes. Generally, liquefiable digital assets have high daily trading volumes. If you notice a digital asset has low trading volume, chances are it’s illiquid, and you may want to stay away.

Now, exchanges play a large role in an asset’s liquidity. Basically, the more users or traders there are, the greater the liquidity and tradability. One way to look for volume rankings by exchange is CoinMarketCap .

One way to analyze whether a market is liquid enough to trade is to see where the volume is in relation to a rolling average. Take a look at the daily chart of Bitcoin / USD (BTCUSD) with the daily volumes plotted, as well as the 30-day average trading volume on Coinbase.

If you notice, the trading volume is below the 30-day average on the rightmost portion of the chart. That said, there may be greater volatility in the price, and market participants may be buying or selling at a premium or discount respectively due to the wider bid-ask spreads.

Another metric that goes hand in hand with liquidity and volume measures is the depth of the market. Depth charts indicate to market participants the level of supply and demand. Depth charts essentially show the supply and demand at various prices. For example, GDAX offers a depth chart that shows two line plots: one for bid prices or buy orders, and one for ask prices or sell orders.

Source: GDAX

Note that the green line is the bid prices, while the red line is the ask prices. The lines are simply just dot plots that are connected, each “dot” represents the amount that could be traded at the specified price.

Similarly, Poloniex offers tools to analyze the depth of the market:

Notice how there are more buyers than sellers. However, the depth is broad on both spectrums. Of course there are buy orders and sell orders at prices far away from the mid-market price or where the asset is currently trading.

If you go on a platform and look at the depth chart, you should be able to hover over the lines and see exactly how much you could buy or sell and at which price.

Circulating, Total and Max Supply

In order to properly value a digital asset and its tradability, you need to understand its current and future supply. A digital coin’s supply is one of the most important factors dictating its price. If there is a low circulating supply coupled with huge demand, we can see significant moves to the upside. Conversely, if there is huge supply with little to no demand, you may see price move down or a low daily trading volume. That said, let’s take a look at the circulating supply, total supply and maximum supply.

The circulating supply is the current amount of a digital coin available to trade and use on a daily basis. In other words, it’s the amount of coins being circulated in the market and users’ hands. Now, the total supply is the circulating supply and coins that were mined but not on the market. For example, if a project mined coins and held onto them, they aren’t in circulation.

Now, the maximum supply is the maximum amount of a cryptocurrency that would be produced. For example, the maximum supply of Bitcoin is 21M .

Moving on, if you want to take part in an initial coin offering (ICO), you might want to understand these metrics: commitment ratio and reverse ratio.

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