LIQ
What is the LIQ Indicator?
Before diving into the mechanics of the LIQ indicator, it’s essential to understand the factors influencing the cryptocurrency market:
Long-Term Factors:
These drive external capital inflows and outflows in the crypto market, determining whether a directional "trend market" develops.
BTC Adoption Rate: The percentage of people outside the crypto space recognizing BTC as a valuable asset. For example, Bitcoin ETFs being approved in 2024.
Overall Monetary Market Liquidity: Factors like U.S. interest rate hikes or cuts, and the expansion or contraction of the balance sheets of major central banks.
Crypto-Specific Trends: Topics that attract external capital, such as DeFi, NFTs, or ICOs.
Short-Term Factors:
Short-term market movements are primarily driven by "high-leverage liquidations," leading to a volatile, range-bound market.
High Leverage in Derivatives Markets: Crypto retail investors tend to use high leverage in contracts, making derivatives markets a key tool for market makers to "harvest" retail positions. Hence, short-term price movements are often influenced by derivatives data.
Market Maker Perspective: Market makers evaluate the cost of manipulating prices to liquidate leveraged positions versus the potential profit. They will only act if the potential gains significantly outweigh the costs.
What is LIQ?
LIQ is an indicator designed to analyze movements in a volatile market. Below is a detailed breakdown of its logic:
Core Logic:
LIQ is a standardized indicator calculated using the ratio of quantities in the spot order book.
Order Book Composition: Comprised of buy orders (bids) and sell orders (asks).
CoinKarma's Proprietary Algorithm: Standardizes calculations to identify price ranges where the cost of upward or downward movement for market makers is higher.
Interpretation Logic:
The LIQ indicator helps assess the cost of upward (buy up) or downward (sell down) price manipulation by market makers.
High LIQ (>3): Indicates deeper buy orders in the lower order book. This means it’s costlier for market makers to push the price down, suggesting a likely bottom in a volatile market.
Low LIQ (<-3): Indicates deeper sell orders in the upper order book. This makes it costlier for market makers to push the price up, suggesting a likely top in a volatile market.
In simple terms, the LIQ indicator reveals the cost of market maker manipulations. When the cost of price control becomes too high, market reversals are more likely.
How to Use the LIQ Indicator
Using LIQ Alone to Identify Entry Points
If we define the price movements within the white box as a large volatile range, LIQ effectively marks both the range's bottom and top. (Benchmarks: +3, -3)
Chart Behavior:
Green Arrows: Appear when Overall LIQ > 2 and BTC LIQ > 3.
Red Arrows: Appear when Overall LIQ < -2 and BTC LIQ < -3.
Example:
After the first green arrow appears in a volatile market, there’s often still significant distance to the actual bottom. This is due to the crypto derivatives market's natural long bias, making liquidating long positions more profitable. Even if the cost of pushing prices lower is high, market makers may continue to do so.
Conversely, after the first red arrow, the distance to the top is usually shorter than the green arrow's distance to the bottom. Therefore:
When green bars appear, gradually build long positions.
When red bars appear, close positions more promptly.
Using CVD as an Alert for Overextended LIQ
LIQ is based on order book (limit order) data (bids and asks). However, when market buy pressure (reflected in rising CVD) is strong, it can cause LIQ to overextend. CVD can be used to filter out trending markets, avoiding short positions in a strongly upward market.
Combining LIQ with Other CoinKarma Indicators
CoinKarma develops multiple indicators to complement LIQ for better trade strategies.
Examples:
LIQ + LIQ Accumulated: Stricter entry/exit conditions, though trading opportunities are fewer.
Purple box: LIQ; Yellow box: LIQ + LIQ Accumulated.
LIQ + ALT Resilient Index: Similar stricter strategy for entries/exits.
Purple box: LIQ; Yellow box: LIQ + ALT Resilient Index.
By backtesting with various configurations, users can build LIQ-based trading strategies.
LIQ-Derived Indicators
Overall LIQ
Principle: Same as LIQ but weighted by market cap, representing overall market liquidity.
Difference: LIQ focuses on a single asset (e.g., BTC/USDT), while Overall LIQ represents the broader market, showing the same data across all trading pairs.
Overall LIQ is a market cap-weighted liquidity indicator that reflects the overall liquidity of the market. No matter which trading pair you’re viewing, the data shown remains consistent. In simple terms, LIQ focuses on a single market, while Overall LIQ provides a broader view of the entire market.
Currently, the coins included in CoinKarma’s Overall LIQ are:
(BTCUSDT, BTCUSD, ETHUSDT, ETHUSD, XRPUSDT, SOLUSDT, DOGEUSDT, ADAUSDT, AVAXUSDT, DOTUSDT, LINKUSDT, BCHUSDT, NEARUSDT, PEPEUSDT)
Application: Combine LIQ with Overall LIQ for more sensitive and frequent short-term trading signals.
Accumulated LIQ
Principle: Adds a time dimension to LIQ by accumulating past values.
Application:
1-hour time frame: Default settings (24, 60, -60).
4-hour time frame: Default settings (50, 100, -100).
10% Orderbook DIF
Principle: Measures the difference in bid-ask within the top 10% of the order book.
Application: Helps gauge the liquidity strength of buyers or sellers under identical LIQ conditions.
10% Overall Liquidity
Concept: The metric is based on the difference between bids and asks within 10% of the overall market order book. (Referencing the coins currently included in CoinKarma’s Overall LIQ.)
Application: By analyzing the 10% Overall Liquidity, we can observe that—given the same Overall LIQ values—buy-side liquidity in the yellow box is greater than that in the purple box. (Default thresholds are set at 300 million and -300 million.)
Overall Liquidity – Displayed in BTC: You can choose to display liquidity in BTC through the indicator settings. (Default thresholds: +3000 BTC, -3000 BTC.)
The logic behind it is: the difference between bids and asks within 10% of the overall market order book, divided by the current BTC price. In a bullish scenario, backtesting has shown that this metric has strong predictive value for price movements.
Conclusion: LIQ's Strengths and Limitations
Applicable Scenarios
LIQ performs best during range-bound markets with no significant capital inflows or outflows.
Limitations
Trend Markets: LIQ struggles during strong directional trends, as seen in November 2024 when external capital pushed BTC from $67K to $99K.
Macro Factors: Events like aggressive interest rate hikes in 2022 caused large capital outflows, reducing LIQ's effectiveness.
Asset-Specific Thresholds: Different assets may require adjusted LIQ benchmarks due to varying market-making styles. Users can fine-tune settings for better accuracy.
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