Volume vs. Order Book Depth

Artificially created trading volume by crypto exchanges has become an increasingly concerning issue throughout the industry. With the interest in cryptocurrencies rising and their number one use case being speculation, the amount of crypto exchanges who want to get a share in the high-margin revenue market of trading fees is growing rapidly. However, most of these new exchanges use one of three common user interfaces and have the exact same digital assets integrated than other exchanges, so little to nothing sets them apart from their competitors. Accordingly, most of them have difficulties to attract a large number of customers and therefore decided to boost the position of their exchange in ranking sites like CoinMarketCap. As all of these rankings are currently based on trading volume, an increasing number of exchanges started to integrate bots that trade the same coins back and forth, creating hundreds of millions in trading volume even though some of those exchanges have hardly any users.

So, how can we rank exchanges differently than by trading volume? Fairly recently, I introduced a method called “order book depth” to rank exchanges by their provided liquidity. The metric displays the amount of coins that can be bought/sold in an order book per market order, without moving the price by more than one percent. Fortunately, with Coinpaprika the first exchange ranking site has stepped up and started to implement the feature. However, in this article I want to make another step forward and run a little comparison of order book depth data against trading volume.

As a case study, I made a snapshot of the order books of 104 exchanges, that had an accessible order book and a 24-hour trading volume of above 200k USD in their most frequently traded BTC/Fiat or BTC/Stablecoin trading pair on 21-03-2019. By the time the snapshot was taken, on 15 of these 104 exchanges, one could have sold 100 BTC (currently around 400,000 USD) per market order and wouldn’t have hit buy orders 1% below the current market price. I ranked these 15 exchanges by order book depth and also added the reported 24-hour volume on these trading pairs (according to exchange ranking site CoinPaprika) to the graphic, showing that trading volume and order book depth are not necessarily correlated:

As displayed in the graphic, the exchanges that have been around for a long time are also the ones, that have the highest liquidity. Bitfinex and HitBTC are positioned on the first and third spot of the list, providing enough depth in their BTC/Tether order books to sell over 700 BTC on Bitfinex and close to 500 BTC on HitBTC without hitting buy orders 1% below the current price. The biggest order book concerning the 1% price range of buy orders on the BTC/USD pair is provided by Coinbase Pro (551 BTC), followed by Kraken (430 BTC), Bitstamp (343 BTC) and Gemini (227 BTC). With Liquid, Bitflyer and Coincheck three exchanges also made it into the list, with a BTC/JPY (Japanese Yen) trading pair.

However, in contrast to these 15 very liquid exchanges, 89 of the 104 exchanges failed to provide enough liquidity to sell over 100 BTC per market order without hitting buy orders 1% below the current price. Regarding the 1% price range, one could have sold 50-100 BTC on 12 exchanges, 20-50 BTC on 11 exchanges, 10-20 BTC on 15 exchanges and 1-10 BTC on 23 exchanges. On 28 of these 104 exchanges, which all had a daily trading volume above 200k USD in their most frequently traded BTC/Fiat or BTC/Stablecoin pair, one could not have sold more than 1 Bitcoin without hitting buy orders 1% below the current price.

How does the evaluated order book depth relate to the reported trading volume of the considered trading pairs on these 104 exchanges? The data suggests that there are three types of exchanges: Some don’t artificially inflate their trading volume, some partly inflate it but have significant real trading volume as well and some exchanges have mostly artificial trading volume and almost no real volume.

In the data set, the exchanges with the highest liquidity in their order books mostly generated a double-digit million USD trading volume in this specific trading pair. To name a few: Bitfinex was at 41 million USD, Kraken at 20 million USD, Bitstamp at 28 million USD and Bithumb was at 61 million USD. Remember, these are exchanges with a very high liquidity. Interestingly enough, the average daily trading volume in the evaluated trading pairs across all 104 exchanges was at 43 million USD. So, on average each exchange in the list had more daily trading volume than for example Coinbase Pro or Gemini.

To further analyze the connection between trading volume and order book depth, I ran a correlation test between the two. One should expect a slightly positive correlation between the two factors, since they seem to be intertwined. However, that wasn’t the case. While an outcome of 1 in the correlation test determines a perfect positive correlation and an outcome of -1 determines a perfect negative correlation between two input variables, the correlation coefficient between trading volume and order book depth was rated at 0.02. It shows, that both factors are completely uncorrelated and there is not even a slightly positive relationship between them.

Let’s declare the trading volume on Coinbase Pro, Kraken and Gemini as real volume. All of these have packed order books, but don’t have that much volume (compared to other crypto exchanges). For example, the order book depth of Gemini, Huobi and Liquid was in the same range in the analyzed data sample (around 200 BTC could be sold with the price not declining by more than 1%), but the trading volume on both Huobi and Liquid (each around 100 million USD) was 10 times as high as on Gemini (around 10 million USD). Adding to these, the daily trading volume on Binance for example was 2.5 times as high than the volume on Coinbase Pro, even though Binance had only 22% of Coinbase Pro’s liquidity in their order books.

Does that mean that all the volume on Binance, Huobi and Liquid is fake? No, it doesn’t. Does it mean, that the volume on Binance, Huobi and Liquid is partly inflated with artificial volume? Probably, but not necessarily. Probably the exchanges inflate their real trading volume with artificial volume to attract traders. Probably all their volume is real and caused by traders who just like to trade more on these exchanges than on other exchanges due to a better trading experience or lower trading fees. As long as an exchange provides decent liquidity in their order books, it is hard to prove that their volume is partly or entirely fake.

However, fake volume is pretty clearly generated by some exchanges that claim to generate multiple million USD in daily trading volume, but one cannot even sell a few BTC without crashing the price on the exchange. To give you an example: Of the analyzed 104 exchanges, 16 reported a daily trading volume of over a million USD in a BTC/Fiat or BTC/Stablecoin trading pair, but you could not even sell one (!) Bitcoin without making the price decline by more than 1%. These exchanges are clearly trying to trick customers and should be excluded from rankings by trading volume.

The biggest limitation of this analysis is its limited dataset. The reported order book depth is based on a snapshot of a single day and was partly refined with trading data from two other days. Unfortunately, there is not yet a central source available for order book depth, which makes the process of collecting data extremely time-consuming. Adding to that, some order books were not fully accessible and were therefore excluded from the analysis. However, that doesn’t mean the analysis is not significant – if an exchange failed to provide liquidity in the snapshot, it most likely can’t provide liquidity in general.

Additionally, it has to be noted that the amount of BTC used in the analysis originates from the order books provided by the particular exchanges. Some of these order books may be intertwined because an exchange might display order book entries of other exchanges on their own exchange, that are integrated through a trading API. Furthermore, alongside the reported trading volume, the entries in an order book can be faked. It would be possible for an exchange to make orders disappear in the second a user hits the buy/sell button and make these orders appear again, after the trade has been executed. However, it would certainly damage the reputation of these exchanges, so I am not sure, how long they could sustain a faked order book.

I also want to add, that the exchanges mentioned in the list are not necessarily the best crypto exchanges, just because they provide liquidity. A lot of controversy has been surrounding Bitfinex or Tether for the past couple of years and HitBTC has been in the news recently for not allowing their users to withdraw funds. However, this list and the underlying metric of order book depth is thought as an improvement towards ranking exchanges by volume, since trading volume is often understood as liquidity, but in the current state of the cryptocurrency market, reported trading volume and liquidity on an exchange are totally uncorrelated.

In this article, I used the method of order book depth to evaluate the trading volume on exchanges. In a data set of the most frequently traded Bitcoin/Fiat or Bitcoin/Stablecoin pairs on 104 exchanges with a daily trading volume above 200k USD, I identified the 15 most liquid Bitcoin exchanges, where one could sell over 100 BTC without the price declining by more than 1%. In addition to these, I showed the allocation of sellable Bitcoin on less liquid exchanges. The average daily trading volume in the evaluated data set per trading pair on each exchange was at 43 million USD, which was higher than the trading volume on some of the most liquid exchanges. As a final conclusion, a correlation test showed that trading volume and order book depth were completely uncorrelated.