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Crypto Liquidity Report

Measuring crypto liquidity using high-resolution order book data

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Recently, we conducted a first-of-its-kind analysis to measure the liquidity of crypto assets using high-resolution Binance order book data. In this report, we assess and rank the 159 cryptocurrencies on Binance based on their liquidity in August 2019.

To measure liquidity, we use slippage, which measures the price impact of a buy or sell order. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. Deep, liquid order books have low slippage, while thin, illiquid order books have high slippage.

We believe slippage is a more robust indicator of liquidity than trading volume. As an ex-ante metric, slippage measures information used by traders before they trade to decide whether to execute the trade and in which venue to execute it. In contrast, volume is an ex-post metric and can be easily manipulated.

Hummingbot Strategy Hacks 101

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Hummingbot currently comes with three main built-in trading strategies. A quick recap, these are:

  1. Pure-market making: the most general form of market making, placing bid and asks for a single token pair on a single exchange.
  2. Cross exchange market making (aka liquidity “mirroring”): making orders on one exchange (typically a less-liquid exchange, e.g. a DEX), and hedging those orders on another, more liquid exchange (e.g. Binance).
  3. Arbitrage: monitoring a single token pair (or equivalents, e.g. different stable coin pairs) and trading when there is a pricing dislocation (buy low, sell high).

But did you know that you could use these strategies as building blocks to create other trading strategies? As the Hummingbot team continues to build out the capabilities of Hummingbot, particularly additional exchange connectors and strategies, there are other strategies users can already derive from the existing three strategies above.

Managing Your Bot's Performance

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Tracking your cryptocurrency trading profits and losses (P&L) is essential for evaluating the effectiveness of your trading strategies, investment decisions, and portfolio management approach. In traditional financial markets, calculating P&L is straightforward, thanks to established conventions and regulations. However, in the cryptocurrency realm, this task becomes more complex due to:

  1. Market fragmentation: Crypto traders often have assets across multiple exchanges and wallets.
  2. Varied asset pricing conventions (e.g., some assets are priced against Bitcoin or Ethereum).
  3. Non-standardized accounting methodologies.

This post will address these challenges and offer tips for determining the profitability of your crypto trading strategies.

TLDR

Hummingbot calculates profitability by comparing the portfolio value of the starting balance and the current balance, based on the current exchange rate.

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Running Hummingbot in the Cloud

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Users aiming to operate Hummingbot for extended periods or to run multiple bots simultaneously may find local installation limiting. Each bot requires its docker image, consuming significant local computing power, memory, and storage. Additionally, the bots can only function while your computer is active.

Despite these constraints, leveraging cloud-based Hummingbot offers numerous benefits. It ensures a stable connection, critical for continuous order book data fetching and order placement. Virtual machines enhance connection stability and transaction speed, particularly when servers are geographically closer to exchanges. Moreover, the affordability and simplicity of modern cloud computing instances have made it viable for individual users to maintain their own cloud servers.

This post evaluates major cloud computing services, focusing on features pertinent to Hummingbot users. Selecting the right provider and setup is now easier than ever with appropriate guidance and documentation.

How I Started Crypto Trading - Manuel

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Welcome to the third interview in our series! Today, we're excited to introduce Manuel Zeiler, an experienced crypto trader and co-founder of the DApp discovery platform, Token Valley.

Manuel once developed a crypto market-making bot that operated on IDEX, Bittrex, and HitBTC, achieving an impressive 10% monthly profit! He is currently pursuing his master's thesis in blockchain at the Munich School of Management.

Let's get to know Manuel!

Manuel Zeiler

Disclaimer: All views expressed in this interview are solely those of the interviewee and do not represent the opinions of hummingbot.io.

How did you get into crypto trading? Have you traded other assets before?

I began trading cryptocurrencies in 2017, and interestingly, it was my first foray into trading of any kind. I hadn't dealt in stocks prior to this. My background in technology, particularly in blockchain, led me to explore trading. I started with classic arbitrage between EtherDelta and centralized exchanges in 2017, followed by market-making on both centralized and decentralized exchanges in 2018.

Exchange Types Explained: CLOB, RFQ, AMM

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Since Hummingbot is an open source bot platform that connects to many different exchanges, we have developed a deep understanding of the nuances between various exchange types.

In this post, we discuss the three main methodologies that digital asset exchanges use to facilitate asset transactions. We hope that this post helps crypto traders and developers choose the right exchange for their needs.

TLDR

Exchanges perform the fundamental role in free markets of bringing together and coordinating buyers and sellers. Exchanges provide a venue for these parties to discover one another, negotiate and agree terms, and ultimately transact. Exchanges have adopted multiple methodologies to achieve this:

Hummingbot vs Uniswap: Two Approaches to Liquidity

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Since both Hummingbot and Uniswap are both open source projects that allow users to make money by providing liquidity, many people have asked how they compare to each other.

Below, we shed more light on their similarities and differences and explain why the two projects are highly complementary.

The Thin Crust of Liquidity

The role of market makers and importance of liquidity in the crypto industry

Eric Noll was getting frustrated. It was November 2011, and the senior Nasdaq executive was struggling to explain to a mostly disinterested House of Representatives panel why the changing stock exchange landscape was wreaking havoc for smaller public companies:

Today's US markets are increasingly fragmented and volatile. Liquidity in US stocks is dispersed across 13 exchanges and over 40 other execution venues. The declining cost of launching and operating electronic order crossing systems has led to a proliferation of decentralized pools of liquidity. However, the unintended consequences of that market fragmentation have been a lack of liquidity and price discovery in listed securities outside of the top 100 traded names. Such fragmentation of trading creates a thin crust of liquidity that is easily ruptured, as occurred on May 6th (i.e. the 2010 Flash Crash)

Stifled yawns from Congressional onlookers aside, Noll was describing an unintuitive but important phenomenon that would make Milton Friedman roll over in his grave: more competition from exchanges leads to less liquidity for small issuers and greater systemic risk.