LIQ
Last updated
Last updated
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.
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.
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.
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.
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.
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.
Application: Combine LIQ with Overall LIQ for more sensitive and frequent short-term trading signals.
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).
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.
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.
