95% of cryptocurrencies are illiquid

I often hear that the majority of cryptocurrencies will eventually go to $0.

While that’s not exactly the case, it’s technically true nonetheless: most of the coins won’t go to zero-value but they will be illiquid. In fact, most of the cryptocurrencies are already illiquid today.

CoinGecko, perhaps the most accurate data aggregator, currently lists 6,445 cryptocurrencies while CoinMarketCap has nearly 5,000. How many of them are illiquid? That’s hard to tell exactly but let’s dive into the data.

As I’ve mentioned before, evaluating exchanges by order book depth is far superior for traders rather than just looking at the volume. Volume can be very easily faked, which is why order book depth is a much more indicative metric and a reasonable proxy to liquidity.

Looking at the entire order book is impractical because it could give a false impression of liquidity due to extreme values. I used the data from Coinpaprika, which uses a 10% section from the midpoint price. It’s important to note that order book depth is measured at one point in time (Dec 20, 9:30 UTC in this case) but the results appear to be consistent with historical order book depth analysis.

After removing all stablecoins, the 20 cryptocurrencies with the deepest liquidity can be seen below:

Source: CoinPaprika, The Block

When looking at aggregate combined orders from all exchanges, bitcoin appears to be five times as liquid as ethereum and more than 10 times as liquid as all the other cryptocurrencies including EOS, litecoin, XRP, and bitcoin cash.

Illiquidity

The chart below illustrates just how much of a gap there is between Bitcoin and all other trailing cryptocurrencies.

Source: CoinPaprika, The Block

It’s hard to define at exactly which point an asset becomes illiquid. For the purpose of this analysis, I (conservatively) defined illiquidity as less than $10,000 of combined orders within a 10% section of the order book. There are currently 351 cryptocurrencies that have more than $10,000 of combined orders.

This means that 94.6% of all cryptocurrencies are currently illiquid. I suspect this number will only continue increasing and liquidity will consolidate to less than 20 cryptocurrencies.