Identifying fake liquidity in Bitcoin (BTC) and cryptocurrencies is essential for traders who do not want to be surprised by sudden drops in low volume.
These make it virtually impossible to implement stop losses and usually lead to unexpected results. By analyzing how market makers are organized, their order book mechanisms, and some practical indicators that can detect artificial volume, traders can spot potential red flags and avoid unwanted results.
Market Maker Dynamics and Order Book Mechanisms
Market makers play a pivotal role in the cryptocurrency markets by providing liquidity through various buy and sell orders. However, their activities are not always smooth. These companies manipulate the market by placing large orders close to current prices to create misleading information about supply or demand (known as spoofing), or by buying and selling identical assets while simultaneously inflating volume numbers. can be manipulated.
These entities can also often manipulate market conditions to their advantage by taking advantage of benefits such as reduced trading fees or access to tokens that are not available to the general public. However, no matter how fraudulent and clever these entities may be, there are three clear indicators that provide warning signals that can help experienced traders detect anomalies and avoid being stranded on a token that crashes as soon as a decent-sized sell order enters the market.
Order book depth and free market capitalization relative to trading volume
When looking at cryptocurrency pairs, compare the depth of the order book with the reported daily volume. An imbalance between shallow order book depth and high volume suggests manipulation. For example, if a cryptocurrency pair shows a depth of $50,000 at the 5% level but reports a daily volume of $2 million, the volume may be artificially inflated and not supported by real trading interest.
Notice how Akash (AKT)’s trading volume significantly exceeds the 2% order book depth, even on exchanges that are generally considered safe from market manipulation. For comparison, the DYDX token, which has a similar market cap, was bidding at $457,900 on Binance, 2% below the market price, $209,000 on OKX, and $64,700 on Crypto.com, which is about 3.5 below the average of AKT’s top three exchanges. It’s twice higher.
It is also important to evaluate trading volume in relation to free market capitalization, which represents the total tokens available for trading. If daily trading volume consistently exceeds 30% of a token’s free market capitalization, it indicates unusual activity. This warning should be ignored for the first two trading days after a new listing. This is usually a reflection of hype versus genuine interest. This is especially true if it is your first listing on a major exchange.
Gaps and inconsistencies in trading volume
Beware of sudden and unexplained volume gaps. These gaps, where large portions of cryptocurrency trading volume disappear and then reappear intermittently, can be caused by a number of factors, including server downtime, withdrawal of liquidity by market makers, and exchanges engaging in wash trades to create the illusion of activity. These patterns are unnatural and usually indicate an attempt to manipulate market perception.
According to TokenInsigh data, the above example shows a clear gap in APENT (NFT) trading volume. Listed on KuCoin, Bitget, Bybit, and Gate.io, the token generally had a 24-hour volume of between $1.7 million and $2.9 million during the two-week period analyzed. However, in the 6-hour period on June 22, this average volume dropped to just $250,000, indicating that it may be fake volume.
To effectively detect fake liquidity, traders should use analytical tools to closely examine the depth of the order book. Websites such as CoinMarketCap, CryptoCompare, and Coingecko can provide comprehensive data on trading volume and token availability, including details on locked tokens. Similarly, order book depth analysis can be found on Okotoki, TensorCharts, and TRDR.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.