Identifying fake liquidity in Bitcoin (BTC) and cryptocurrencies is essential for traders aiming to avoid being surprised by sudden sharp declines in low volume. 

These make it virtually impossible to execute stop losses and usually lead to unexpected results. By analyzing how market makers are organized, order book mechanics, and a handful of practical indicators that can detect artificial volume, traders can spot potential red flags and avoid unwanted consequences.

Market maker dynamics and order book mechanics

Market makers play a pivotal role in the crypto markets by providing liquidity through multiple buy and sell orders. However, their activities are not always benign. Those entities might manipulate the market by placing large orders near current prices to create a misleading appearance of demand or supply, known as spoofing, or engage in wash trading—simultaneously selling and buying the same assets to inflate volume figures.

Additionally, these entities often enjoy benefits like reduced trading fees or access to tokens not available to the public, enabling them to sway market conditions to their advantage. But regardless of how deceitful and savvy those entities are, there are three solid indicators that essentially provide some warning sign, allowing experienced traders to detect anomalies and avoid getting stranded on tokens that end up crashing as soon as a decent-sized sell order enters the market.

Traded volume vs. order book depth and free market capitalization

When examining a crypto pair, compare the depth of the order book with the reported daily trading volume. A disproportionate relationship where the order book depth is shallow yet the trading volume is high suggests possible manipulation. For instance, if a crypto pair shows a depth of $50,000 at a 5% level but reports a daily volume of $2 million, it could indicate that the volume is not supported by actual trading interest but rather inflated artificially.

Akash (AKT) order book depth vs. 24-hour volume. Source: CoinMarketCap

Note how Akash (AKT) volumes vastly surpass the 2% order book depth, even on exchanges typically deemed safe from market manipulation. As a comparison, DYDX token, which holds a similar market capitalization, presented $457,900 in bids 2% below market price at Binance, $209,000 at OKX, and $64,700 at, nearly 3.5x higher versus AKT’s top-3 exchanges average.

It’s also critical to assess trading volumes in relation to the free market capitalization, which represents the total tokens available for trading. When daily volumes consistently exceed 30% of the token’s free market cap, it means there’s unusual activity. This alert should be disregarded in the first two trading days after a new listing, as it typically reflects hype and genuine interest, especially when listed for the first time at major exchanges.

Gaps and inconsistencies in trading volume

Look out for sudden and unexplained gaps in trading volumes. These gaps, where a significant percentage of the cryptocurrency’s volume disappears and reappears intermittently, can be caused by several factors such as server downtime, market makers withdrawing their liquidity, or exchanges engaging in wash trading to create the illusion of activity. Such patterns are unnatural and typically indicate attempts to manipulate market perceptions.

APENFT (NFT) aggregate spot volume, USD. Source: TokenInsight

The example above shows a clear gap in APENT (NFT) trading volume, according to TokenInsigh data. The token, listed at KuCoin, Bitget, Bybit and, typically presented a 24-hour trading volume between $1.7 million and $2.9 million in the 2-week period analyzed. Yet, during a 6-hour period on June 22, such rolling average volume dropped to merely $250,000, indicating a potential fake volume.

To effectively detect fake liquidity, traders should use analytical tools to scrutinize order book depth. Websites like CoinMarketCap, CryptoCompare and Coingecko can provide comprehensive data on trading volumes and token availability, including details on locked tokens. Similarly, order book depth analysis can be found at Okotoki, TensorCharts and TRDR, among others.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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