CoinMarketCap Introduces Liquidity Metric In Bid To Increase Data Transparency
Crypto data leader looks to improve accuracy.
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CoinMarketCap is changing things up. If you’re wondering why your favorite altcoin is still ranked at three-hundred-something, you’re probably not alone.
Ranking projects is a complicated measurement affected by a variety of data points, including total eventual supply, circulating supply, and others: in the past, some of the factors influencing ranking have been gamed through practices such as wash trading (essentially the practice of trading against oneself) to create artificial volume – and while this in itself doesn’t translate to a larger market cap in reality, it can temporarily fool the ranking algorithm into displaying a particular token in a ranking system.
However, one of the leading sources of market data is now taking steps to un-rig the game. CoinMarketCap has announced a change in ranking methodology, in order “to represent cryptoassets more fairly.” The new metrics will be officially announced on Monday, September 2nd, with a full launch taking place on November 12, 2019.
The crypto industry has recognized wash trading as a major issue for some time; however, obvious solutions necessarily represent obvious opportunities for unethical exchanges or other market participants to simply find new ways to regain their unfair advantage.
In fact, as Carylyne Chan, Head of Strategy noted, “In July we introduced an internal feature that would exclude cryptoassets from being eligible to be ranked in the Top 200 if they did not meet the criteria laid out in Section 10 of our methodology,”
But she also acknowledged that “Due to the segmentation logic of this change, some cryptoassets that did not meet the criteria had harsher-than-intended rank drops.”
You've spoken, we've heard! We will be testing a change in our ranking methodology on Monday, Sept. 2, to represent all cryptoassets more fairly. Please see the full details here: https://t.co/oOFfcliqG5 ? We look forward to your feedback!
— CoinMarketCap (@CoinMarketCap) August 30, 2019
During the first Data And Transparency Alliance (DATA) round table this week, over forty participants representing exchanges, security firms, analytics companies, and the media discussed CMC’s ongoing efforts to bring more information to the crypto community – while Chan was quick to point out that CoinMarketCap does not see itself as a ‘gatekeeper’ of information.
Chan suggested that users of the site would in future be able to “define different parameters” by which they might view data – such as geographical region – and that CMC was introducing logins so that users could set preferences for the most useful data to them.
The shift away from a “one-size-fits-all” methodology could mark a significant milestone in the provision of data analytics in crypto for the retail investor.
Liquidity: A Solution?
In order to rank among the top 200 cryptocurrencies, a virtual asset must now have “Significant liquidity/trading activity” on at least three non-decentralized exchanges, which must be DATA partners or otherwise fulfill indications that the exchange is reliable.
Otherwise, even if the asset has a large market capitalization, it cannot rank among the top 200.
In some cases, exchanges or crypto teams have been able to score large gains in rankings, by pumping the trading volume on otherwise-unknown exchanges. One observer noted that these types of behaviors have been used more as publicity stunts to gain attention for a particular token, rather than as genuine efforts to scam investors.
Some of the current solutions to manipulation on the market, CoinMarketCap explains, are simplistic efforts to exclude any exchanges that are classified as engaged in “wash trading,” while keeping exchanges deemed to not be guilty of allowing the practice.
Others use non-related metrics like web traffic that have no provable statistical significance in the context of trading volumes.
CoinMarketCap’s approach to this conundrum is to “only release a metric that is objective and non-binary,” being “data-driven,” with inclusion of data from all relevant exchanges listed on the site.
Gaming The System: Prevention Methods
To prevent replicability and gaming of the system, CoinMarketCap will use a 24-hour rolling average with randomly timed regular interval polling of order book depth. To further discourage statistical shenanigans, the site will use “dynamic polling depth,” based on the liquidity of cryptoassets. This system will apply across all assets as variables will adapt to the liquidity of each polled asset.
CoinMarketCap aims to use this “liquidity factor,” to achieve three goals:
- Fair: Level playing field for all.
- Objective: Metric is data-driven.
- Public Good-optimizing: Incentive for more liquid markets.
During the round table, Dmitriy Budorin of security firm Hacken suggested that a transparent liquidity measurement may have gone some way toward preventing the QuadrigaCX scandal, in which a Canadian exchange was drained of funds prior to the alleged death of its CEO.
A full breakdown of the company’s approach to measuring volume, market capitalization, and asset rank is available on their ‘methodology‘ page.