Volume is ANTI-liquidity

[markm]

It constantly shocks me how many people hereabouts confuse "liquidity" with "volume".

VOLUME is transactions taking place, which in the case of each transaction means some LIQUIDITY was destroyed by the transaction.

LIQUIDITY is how much volume you COULD do IF you chose to. Each time someone chooses to, they burn up LIQUIDITY.


For example suppose you see a billion coins for sale at 4 satoshis, and an order to buy a billion coins at 3 satoshis.

That is a billion coins of liquidity in each direction, a billion coins you could buy or sell without moving the price.

If the volume is a billion coins bought/sold per day though, all that liquidity could evapourate in a day!

If the colume averages typically only a hundred coins per day though, a billion coins buyable or sellable is many many days wroth of liquidity, not some tiny little amount of liquidity that tycpialy could be gone overnight!


TL;DR volume is anti-liquidity, because each coin of volume consumes a coin of liquidity. Liquidity is how many coins you COULD buy or sell, not how many someone already did buy or sell.


Volume is the past, liquidity is the potential future. As one is supposed to constantly repeat in the invsting/forex field, past performance (volume) is no guarantee of futire performance (liquidity).

Liquidity is good, it says how many coins you could easily buy or sell without making major moves of price.

Volume can be bad, it says how much competition you have in your attempt to get in a buy or sell before the price moves.

Ideal, except if you are the exchange thus hope to gain fees on volume, is huge liquidity with tiny volume. That can mean a very stable price, so you can be surer that the price you see today will still apply some days down the line. It means huge volume could happen if anyone chose to move coins, but currently the price is so spot-on perfect that no-one sees any need to actually move any coins.

With huge liquidity compared to volume, banks can list conversion rates with some confidence, gas stations can list how much of one currency they accept in lieu of another (like stations close to the U.S. border are wont to do for USD and CDN), stores can quote prices in both currencies more easily and so on.

-MarkM-

[Nasakiotoes]

Happy Holidays

Great Post. I'm prob guilty of confusing the two.

I've reread this twice, can you post some real world examples showing numbers. If you have time, of course.

[Cs87kxy]

Happy Holidays

Great Post. I'm prob guilty of confusing the two.

I've reread this twice, can you post some real world examples showing numbers. If you have time, of course.

I don't know If you need to go confusing...
try to summarize easily:

VOLUME is transactions taking place: you sell/buy coins

LIQUIDITY is how much volume you COULD do IF you chose to sell / buy a coins. But even is related to current market.

@markm
Great topic!

[The Sceptical Chymist]

OP I see what you're trying to get at, but I'm not sure I agree with you.  The two things are for all practical purposes equal and I don't think it's wrong to call volume liquidity.  But I've been known to be wrong before, so.

[markm]

Volume is evidence of liquidity having existed at least sufficient to have enabled that volume to happen.

But if for example there are a billion coins for sale and an offer to buy a billion of them, that is a billion of liquidity only until the billion coins are sold, whereupon there is no liquidity remaining but a volume of a billion in the past.

That billion of volume ate the billion of liquidity.

Another clue is seen in exchanges that mention "liquidity providers"; what they mean is people who put sell offers onto the sell side of the order-book or put buy offers onto the buy side of the order-book instead of buying from the sell-side offers or selling to the buy-side offers.

When you look at the order books you have a choice; to buy you can buy from the lowest price offer on the sell side, or you can place a buy offer on the buy side, that is, an offer even lower than the lowest sell offer. Similarly in selling you have a choice between selling to the highest buy offer or placing a sell offer (at an even higher price) on the sell-side of the order-book.

Those offers sitting on the order-books are the liquidity.

If you buy directly from the sell side offers instead of placing a buy offer on the buy side and waiting for a seller to choose to sell to your offer, you are consuming liquidity. Some exchanges charge you higher fees for that because they want liquidity, which is to say, they want offers sitting on the order-books. If you buy from an existing offer ro sell to an existing offer you are consuming that offer, or at least part of it, thus lowering the remaining liquidity.

Volume is a measure of how much liquidity has been consumed. More interesting to folks who weren't there at the time to consume it, surely, ought to be how much liquidity is still there. What does it matter that someone else bought a bilion coins yesterday if that leaves none left for you to buy?

Generally of course a lot of volume tends to attract liquidity-providers, because high volume means a lot of liquidity is being consumed that that surely there must be a demand for liquidity.

But one of the big consequences of the difference between volume and liquidity is the way coins get dropped from exchanges for low volume regardless of how much liquidity they have.

A coin can have billions for sale at the perfect sell price, which is to say, the price below which someone would surely buy them, and billions of buy offers at the perfect buy price, which is to say the price above which someone would surely sell to them, and yet have no volume because everyone already bought all they want (at current prices) to buy and sold all that (at current prices) they want to sell. Vast sums could change hands at any moment. In fiat markets exchanges could be making interest on deposits so might not need to care so much buying and selling happens as long as the interest they make on deposits is enough to cover their expenses, but with crypto typically the exchanges need volume to happen in order to earn the fees they use to pay their operating-expenses. So they drop coins based on volume, not necessarily on liquidity.

A community can spend vast sums of money and vast numbers of keystrokes and hours of key-pressing labour trying to build up huge piles of liquidity in a coin, only have exchanges drop the coin, throwing away all those keystrokes and all those hours of labour typing in offers, before the liquidity accumulation reaches critical levels where, finally, the bagholders hope, it will trigger some actual volume.



When I spend 16 hours a day day after day typing in an offer at every satoshi of price trying to build a solid column of liquidity all the way up to the "spread" (the gap between the buy side and the sell side of the order-book), I do not want volume, I want liquidity.

Here is a specific example with numbers: look at I0Coin on Cryptopia. At every satoshi of price all the way up from the bottom (price of one satoshi) I have placed a buy offer.

That is thousands of offers!

I do not want to see a huge volume happen, I want to see huge increase in liquidity happen!

THAT IS BECAUSE every hundred coins of sell volume selling to my buy offers is one buy offer of mine I will have to re-enter into the system.

Sell me many thousands of coins directly to my buy offers and I have to sit here for hours typing back in the buy offers that you liquidated.

IF YOU PUT IN LIQUIDITY INSTEAD OF VOLUME, that is, if you place a sell offer on the sell side instead of dumping it onto my buy offers, I will see it there and go like ah, wow, awesome, I can buy thousands of coins in just one entry of an offer! No need for me to re-type all the offers I was up all last night typing in! PLUS, you get your wad of coins sold at one price, a price better than any of my sell offers! WIN-WIN! We both win!

(But dumpers slow that down too, because naturally I want to build back up my liquidity pile of offers all the way up to where your sell offer is sitting before taking you up on your sel offer, otherwise you might turn out to be a robot that is just goin to take what I pay for those coins and start mixing in with me way down low in the buy side where I am busy re-typing my offers. So I like to get my offers pile way up near the sell price before buying from the seller directly.)

Still, place a sell offer of thousands of coins a satoshi higher in price than my highest buy offer and of course I will snap it up when I get back to typing in my offers, it wil be in the way of my pile's growth toward the target price I am still for months - actually for years - trying to build my buy offers up to.

It can take weeks to input those buy offers to build a solid column of liquidity, when you trash the whole column way down in price so far that it takes weeks to build back up, that means it can be weeks before enough typing has been done for the column to climb back up to the prices at which folk actually want to sell at. So they sit there waiting for the pile of offers on the buy side to slowly slowly day by day get typed in, meanwhile the exchange sees no volume because the column/pile of buy-side liquidity takes so long to type back in, so the coin gets dropped from the exchange for lack of volume despite thousands upon thousands upon thousands of offers with more being typed in each day.


ANOTHER EXAMPLE-WITH-NUMBERS:

Look at DeVCoin (DVC) on Cryptsy. Massive liquidity: you could buy hundreds of millions or sell a billion without moving the price. But almost no volume, as it happens, yesterday/today. The liquidity is there to allow massive volume to happen, it just hasn't happened yesterday/today... So far...


-MarkM-

[entertheabyss]

OP. so there are a few things i think you are getting confused with,

you are correct with your definition of liquidity but you misunderstand the affect of volume on liquidity,

while its true an individual trade would reduce liquidity within a market by reducing orderbook depth, the effect in aggregate actually increases liquidity. you may notice that bitcoin is the most liquid cryptocoin but also has the greatest trading volume by several orders of magnitude. Trading volume is actually a good measure of liquidity and coins with higher trading volumes are always more liquid than coins with lower volume, trading volume denotes "activity" within a market, and more more active markets mean more traders, more people putting orders on the book and crucially a larger group of people interested in buying or selling with you. So when you visit sites like http://coinmarketcap.com , http://coingecko.com and others they always include trading volume, because its a widely used metric to determine the liquidity of a market.

[markm]

Yeah but those high volume markets are probably high volume because of high liquidity. I think the usual thing folks look at for liquidity is "depth" although what you would want to see for a highly liquid market is a large amount of shallow depth, since the depth way way down at the bottom of the order-books would take a lot of activity to become day to day relevant. You want lots of depth at the current price if you want to move a large volume without moving the price.

Also consider that in day to day affairs a dollar is a dollar whether you are buying something with it or selling something for it, so in a way it'd be nice if the sell price and the buy price are the same; markets try to approach that by allowing finer-grained prices, such as by having a market on which "job lots" of 10,000 dollars at a time are bought and sold instead of individual dollars, so the difference in price per individual dollar or cent can be a small fraction of a cent.

So the smoothest high-volume efficient markets tend toward having massive liquidity at the current price, the more liquidity at or near the current price the better so as to maximise the amount of value that can be moved through the system without moving the prices.

However, volume is measured in both directions, right? So high volume need not mean lots of offers on one side of the order-book being eaten up, it could in fact largely involve market-makers who are putting what they buy and sell back onto the order-books as fast as they buy or sell it, so the same small amount of liquidity can be recycled over and over and over again in the course of a high-volume day if the volume is not one-directional.

-MarkM-

[entertheabyss]

 so the same small amount of liquidity can be recycled over and over and over again in the course of a high-volume day if the volume is not one-directional.

Its technically possible, but even in that case Volume would not be "anti liquidity" but instead uncorrelated with liquidity. For example, 90% of trading volume could possibly be one person or bot trading with themselves. However in aggregate, the affect of volume on on liquidity is positive. A cycle where volume attracts more traders which in turn creates more volume. Sometimes even market manipulators fake volume by trading with themselves in attempt to attract other traders and increase market liquidity, these attempts actually are effective to a degree.

[kelsey]

what shocks me more on this forum is how many constantly confuse 'price' with 'value' 

[markm]

My view is probably influenced by the way stuff has tended to happen in the Galactic Milieu, where most of the time most of the currency doesn't hit the markets at all.  Most currency conversion happens like the way it happens at gas stations along the U.S. / Canada border or at a local branch of your bank when you go in to buy a bit of foreign currency to take with you on vacation or whatever. You look on a currency conversion chart or even watch the news or a newspaper to see what today's price is, add a service fee markup and pow it is done.

Every few months or so though some of the Nations or Corps find they have accumulated more of some of the currencies of the other Nations or Corps than they want to hold in their treasury as backing with which to back their own currency so they approach the issuing Nation about selling it back to them, usually preferably for some of the approaching Nation or Corp's own currency. Or they find their reserves getting low so they approach an issuer to see about stocking up a little.

So volume tends to be sporadic. But also the Open Transactions system supports scales in powers of ten, so typically there will be at least three scales of market available for those who do choose to use the market system instead of directly approaching someone to do an over the counter exchange. So large volume would probably usually happen on large scale markets; if you want to trade job-lots of 100,000 of an asset at a time, in whole lots of 100,000, you would use the 100,000-scale market. Arbitragers would presumably buy at one scale to get "wholesale" type prices then break up the lot to sell on smaller scale markets. This tendency to get better prices when buying in bulk also provides incentive to do sporadic huge transactions rather than constantly running to and from the markets.

Nations and Corps used to run scripts that, knowing from a price conversion table how much each thing was "worth" relative to each other thing, would place orders to buy and sell on three different scales of market at three different premiums, so that the markets for any given asset would always have offers on at least three scales with less premium the larger the scale.

Because the potential traders were all basically huge whales, no trades tended to happen until a large enough overstock or understock of a particular currency accumulated to make it necessary or desirable to do an exchange.

That approach did have some troubling characteristics though. For example as one of the developers who originally created DeVCoin I had kind of hoped that having massive amounts of DeVCoin-based economy in the game would help make DeVCoins valuable, but this tendency of the Nations and Corps and players in general to simply consult price charts rather than actually move coins through markets has led to DeVCoin sitting with low volume and low price on the exchanges even while millions or billions of DeVCoin-denominated economy is going on in the game.

What has been happening is someone whose debts are nominally denominated in DeVCoin will show up at, say, a General Mining Corp depot with fifty million units of Deuterium worth, according to the prices shown at http://galaxies.mygamesonline.org/deuterium.html , many many millions of DeVCoins. General Mining Corp would, of course, normally pay in their own currency, known as GMC, but by consulting tables they can look up how much of various other currencies is supposedly equivalent today and pay out in whichever currency they and the party delivering the Deuterium find mutually convenient.

DeVCoins, of course, are seldom convenient because their market cap is so low that it would be hard to keep on hand enough to pay for even one such shipment, but since the miner's debts are denominated in DeVCoin General Mining Corp can, for a small consideration, take care of sending the creditor the requisite number of DeVCoins worth of something that is mutually convenient to General Mining Corp and the creditor, so DeVCoin-denominated credit is applied against the Deuterium-deliverer's DeVCoin-denominated debt with no actual DeVCoins moving at all.

This all works out to a huge amount of "volume" without  "the usual web-based crypto-exchanges the crypto crowd is used to" seeing any of it.

It is a circular problem too because where are the makers of the currency-conversion charts going to go to figure out how much DeVCoin is worth? If all DeVCoins had been issued ab initio by one Nation or Corp as its own National or Corporate currency one could simply add up the Nation or Corp's worth or treasury or reserves, its "full faith and confidence" or its on file somewhere collateral or whatever it is relied upon to use to "back" its currency, divide by the number of coins, and presto, you know what each coin is supposedly "worth". But DeVCoin, and most crypto coins such as bitcoin itself even, are not like that. You never know whether anyone at all is going to back them nor who it is that is going to. So you look at the exchanges. Where DeVCoin price remains untouched by all this massive DeVCoin-denominated activity.

So, I guess, yet another case of volume not being anti-liquidity!

-MarkM-

[entertheabyss]

My view is probably influenced by the way stuff has tended to happen in the Galactic Milieu, where most of the time most of the currency doesn't hit the markets at all.  Most currency conversion happens like the way it happens at gas stations along the U.S. / Canada border or at a local branch of your bank when you go in to buy a bit of foreign currency to take with you on vacation or whatever. You look on a currency conversion chart or even watch the news or a newspaper to see what today's price is, add a service fee markup and pow it is done.

In international Forex the exchange rate is set by a network of massive clearinghouses with transaction volume measured in the trillions of USD a day. when you go to the typical border town exchange booth what your looking at is actually not actually an "exchange" in the same way bitfinex or okcoin but on the backend they are part of a chain that is plugged into a larger currency exchange network, similar to shapeshift which is hooked up to several exchanges and buys and markups coins for sale to consumers.

So volume tends to be sporadic. But also the Open Transactions system supports scales in powers of ten, so typically there will be at least three scales of market available for those who do choose to use the market system instead of directly approaching someone to do an over the counter exchange. So large volume would probably usually happen on large scale markets; if you want to trade job-lots of 100,000 of an asset at a time, in whole lots of 100,000, you would use the 100,000-scale market. Arbitragers would presumably buy at one scale to get "wholesale" type prices then break up the lot to sell on smaller scale markets. This tendency to get better prices when buying in bulk also provides incentive to do sporadic huge transactions rather than constantly running to and from the markets.

It could be that this arbitrary tiered system is creating an inefficiency in the economy of your game, there is no reason why to not trade digital assets more in smaller batches like on any ol cryptocurrency exchange.

This happens in the real world also. But more commonly finished goods because there is a delivery and production overhead per order. Forex markets don't really have discounts for larger orders. (there are exceptions)

So, I guess, yet another case of volume not being anti-liquidity!

I guess we agree you might want to fix the thread title or something.

P.S. I'm a Freeciv GOD and am on the Open Transactions mailing list, this project sounds pretty cool, can you tell me more about it?

from the link you referenced http://devtome.com/doku.php?id=galactic_milieu it mentioned that your freeciv ruleset was being upgraded from 2.2 to 2.3 but now freeciv is on v2.5, is the project still active?

[entertheabyss]

what shocks me more on this forum is how many constantly confuse 'price' with 'value' 

or worse still, thinking that scarcity somehow make the currency a whole more valuable

[markm]

Last time I updated the (Freeciv) Galactic Ruleset I think 2.4 was the usual FreeCiv that came with Ubuntu 14.04, with 2.5 being a development version. Maybe it is even numbers are production, odd are development or something? Can't remember exactly but I think it was 2.4 I used. I guess the DevTome needs updating.

-MarkM-

[entertheabyss]

Maybe it is even numbers are production, odd are developmen or something?

-MarkM-

Its just been a while, 2.5 was released in march 2015 and 2.4 was released in 2013, 2.3 was 2011 http://freeciv.wikia.com/wiki/News_archive

[tokeweed]

Good post.  So everyone, avoid low volume and illiquid coins.  And be wary of sudden spikes in volume in illiquid coins.  That's a sure ticket to bagholders land.

[markm]

Good post.  So everyone, avoid low volume and illiquid coins.  And be wary of sudden spikes in volume in illiquid coins.  That's a sure ticket to bagholders land.

Bagholders, oh yes! You could maybe say that the Brits, Canucks, Martians, (Galactic) United Nations, General Mining Corp and General Retirement Fund are all professional bagholders, because their contention from the outset was that the big problem with the normal run of cryptocoins - before the IPO-coin era anyway as these folks started up way back after NaMeCoin but before or alongside DeVCoin - is that there is no-one "backing" the coins and, instead of an issuer, they have swarms of issuers, known as miners, who cannot be relied upon to "back" the coins they issue.

Thus by design UKB, CDN, MBC, UNS, GMC, GRF, NKL and such ( see http://galaxies.mygamesonline.org/digitalisassets.html ) all started out as one big "bag" each. They thus could be used as a kind of "I Owe yoU" by their issuers, who are expected to "back" them by buying them back when they come up for sale.

The "standard type of cryptocoins" in which they are most interested are those they feel there is some chance they could acquire a huge proportion of, so that they could reasonably hope to eventually be able to "back" them, or more likely form a Corp to back each such coin so that eventually one could look at the Corp's holdings/reserves and divide by the total number of the coin in existence to compute the value of the coin from a possibly more confident form of "market cap" than that which is obtained by multiplying today's single-coin price by the number of coins in existence.

That in turn of course means they prefer coins that are not still minting large numbers of coins. IXCoin is the classic example of course, because its minting stopped a long time ago now but because of merged mining it can still in principle be secured (meaning rendered secure by high hash rate, rather than meaning acquired) at relatively low cost. Their theory is that eventually one would be able to add up the assets of some kind of "IXCorp", divide those by the number of IXCoins in existence, and thereby compute the value per IXCoin...

-MarkM-