Coin liquidity and turnover: why trading volume is divided by market cap

Liquidity is how readily a coin can be traded when you want, at a price near the one you want. With good liquidity, even large trades go through near the intended price without moving it much.

With low liquidity, even a small order to acquire coins makes the price jump, and an order to exit gets pushed down and filled below a fair price. The gap between the price market participants are offering to pay right now and the price they are asking is called the spread, and the amount by which your own order is filled at a worse price than expected is called slippage. The thinner the liquidity, the larger both become and the bigger the losses.

So liquidity is as important a trait of a coin as its price. However large a coin is, if trades do not actually happen readily, it is hard to get your money out when you want.

Looking only at the absolute amount of trading volume always favors large coins. Big coins naturally have large volumes, so a larger traded amount does not by itself show that coins are changing hands more actively.

Jupick therefore measures liquidity with turnover: daily trading volume divided by market cap. It looks at “how much changes hands in a day relative to the coin's size.” This allows a fair comparison even between coins of very different sizes.

In Jupick's coin grade, turnover carries the second-largest weight. A sufficiently high turnover counts as very active and earns full marks, and the score drops as trading thins out. The exact scoring standards are published in the coin grade methodology document.

High turnover reads as a sign that attention has gathered on the coin, that it is trading actively and that it is relatively easy to trade when you want. But a temporary surge in trading from a particular event or from overheating also pushes turnover up, so high turnover is not always a healthy sign.

Low turnover means few coins change hands, so a single large order can easily move the price. When only a thin layer of market participants stands ready on each side, a coin that is usually quiet can see its price pushed down hard by a sudden rush to exit.

Either way, turnover is a current-state indicator that shows the temperature of the market now, not a signal of whether the price is headed up or down.

Turnover is the volume traded over a day divided by market cap, in other words the size of one day of flow. That is a different matter from depth, meaning how thickly orders are stacked in the order book at this very moment.

Even if daily volume is large, if it was filled by a handful of big trades, the orders available to absorb your own order when you place it may be thin. Conversely, even with modest volume, a tightly packed order book can make trading easy.

Linking heavy volume directly to “you can get out easily at any time” is therefore risky. Flow (volume) and depth (order book thickness) need to be viewed together. Jupick's turnover is a reference indicator for gauging liquidity, and actual fills depend on the depth of the exchange's order book at that moment.

First, a surge in volume is not always good news. Volume also spikes when bad news triggers a rush to exit or when large-scale liquidations pile up. A jump in turnover is not a positive sign by default.

Second, exchanges count volume in different ways, and there has long been controversy over wash trading, fictitious trades that inflate volume without any real trade taking place. So rather than relying on a single absolute figure, it is safer to also look at how different turnover is now compared with usual.

Jupick provides liquidity indicators only as reference material on the current state and gives no trading advice on any coin. This content is for information only and is not investment advice.