Liquidity of cryptocurrency: how to measure it?

There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. Our comparison guide will help you to pick a bot that best suits your trading style. Solo BTC mining consumes 266k kWh on average, with varying household electricity costs around the world ranging from $260 in Lebanon to $208.56k in Italy.

It is not recommended to trade obscure coin pairs which have limited popularity and trading volume can impair your investment positions. The above order book was taken from Cobinhood exchange, which had an illiquid BCH/BTC trading pair given large wide spread. Cobinhood’s bid-ask spread is $37.03 while Binance’s spread was only $1.57. If you were to trade the BCH/BTC trading pair in Cobinhood, it is going to be less efficient and more expensive. You can also observe that in an illiquid exchange such as Cobinhood, the size of the orders (‘Amount’ column) were much smaller than the average orders in Binance.

For instance, if the 24-hour volume of Bitcoin’s market is USD $300 million, it means that the total value of Bitcoin transacted within a span of 24-hours and across all exchanges amount to USD $300 million. The end of the partnership may also not be a big deal for the industry as a whole, said Leo Mizuhara, CEO of Hashnote, a CFTC-regulated institutional digital asset management platform. In this blog we discuss the academic research surrounding the question of cryptocurrency liquidity. Liquidity indicates how easy it is to convert a cryptocurrency into cash quickly — and whether this can be achieved without the asset’s value suffering.

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In its simplest form, liquidity indicates how easy it is to quickly convert a cryptocurrency into cash — and whether this can be achieved without the asset’s value suffering. All in all, liquidity is widely considered to be a crucial element in trading – overlooked by many beginner traders. Without sufficient liquidity, traders either get stuck in positions or end up paying a big premium to market prices. Liquidity risk happens in all markets but is most prevalent in real estate markets. This phenomenon has triggered multiple housing market crashes, simply because there is insufficient buying interest to withstand the new selling pressure.

Distinct liquidity clusters for Ethereum (ETH) and Dash are observed for BTC, LTC, and Ripple (XRP). Moreover, liquidity connectedness is more pronounced in the short-run time horizon than in the medium- and long-run time horizons. This paper investigates the efficacy of low-frequency transactions-based liquidity measures to describe actual (high-frequency) liquidity. Both measures perform well during high and low return, volatility, and volume periods. The Kyle and Obizhaeva (2016) estimator and the Amihud (2002) illiquidity ratio outperform when estimating liquidity levels.

  • It seems that the mechanism of AMM and liquidity pools can be more effective than the traditional order book.
  • Traders should be prepared for this – for example by using market orders or stop market orders.
  • Overall, always do your own research before investing in any project, and also note that this article is only for educational purposes and not financial advice.
  • There is an increasing presence of Bitcoin in the form of ATMs, exchanges, transactions in shops, casinos, and elsewhere.

Then, the use of Bitcoin in retail transactions suffered from negative publicity related crypto scams and the price crashes of 2017, 2020, 2021, and 2022. But the future of cryptocurrencies as a medium of exchange looks brighter than it did a few years ago, especially with increased institutional interest. As a result, calculating the exact liquidity of the exchange or market is difficult. However, there are other signs that can be used as proxies for liquidity in cryptocurrencies. For any investment, one of the most important considerations is the ability to efficiently buy or sell that asset if and when the investor pleases. After all, what is the point of profit if the seller is not able to realize their gains?

A similar example is when you try to buy fresh produce at your local markets; there is a higher tendency for you to shop at a bustling market with lots of sellers and buyers rather than a market with few market participants. In total, the dynamic analysis shows a steady increasing trend in liquidity connectedness for cryptocurrencies. However, a large portion of this connectedness is attributed to short-run connectedness, which indicates the contagion effect. This observation of the contagion effect in the cryptocurrency market has also been reported in the volatility connectedness in cryptocurrency markets (Yi et al. 2018). In post-2017, the liquidity connectedness shows a gradual upward trend, with the connectedness index approaching 80% in early 2019. Such higher liquidity connectedness in the cryptocurrency market is attributable to developments such as introducing real-time settlement systems and cryptocurrency trading pairs, that is, XRP/BTC.

Dynamic connectedness analysis in frequency domains

We select the six most liquid cryptocurrencies, namely, BTC, LTC, ETH, XRP, Monero (XMR), and Dash. At the moment, these cryptocurrencies are the most important in terms of trading volume. Within our sample, as of 2019, in terms of trading volume and market capitalization, BTC is the largest cryptocurrency, followed by ETH, LTC, XMR, Dash, and XRP (Al-Yahyaee et al. 2020). We consider these six cryptocurrencies as they attract considerable attention from investors, policymakers, and academics, such as Al-Yahyaee et al. (2020). The liquidity and popularity of these cryptocurrencies are critical elements of our choice to include them in this study. All cryptocurrencies’ daily prices and trading volumes constitute our dataset, spanning from August 7, 2015, to December 28, 2019.

Both of these activities help to ensure that a centralized exchange is able to provide liquidity for its users. Without liquidity, it can be difficult to move in and out of positions quickly or to accurately price assets. It helps to create a more efficient and orderly market, as it reduces the spread between the bid and asks prices of assets. So high volume allows for easier inter-conversion between different cryptocurrencies, fiat money, and other assets.

Using the DY2012 network-based spillover approach, we report a moderate liquidity connectedness among sample cryptocurrencies, with BTC and LTC playing a significant role concerning the magnitude of connectedness. Conversely, XMR and Dash are the least connected currencies in the liquidity network. Additionally, in our liquidity clustering analysis, BTC and LTC, along with XRP, form a distinct liquidity cluster, whereas we observe separating clustering between ETH, XMR, and Dash. Following the network-based liquidity connectedness analysis, we move to estimate and analyze liquidity clustering in the cryptocurrency market. Ji et al. (2019) reported that cryptocurrencies tend to show similar (different) returns and volatility patterns, which potentially make them compliments (diversifiers).

The most popular DEX is Uniswap, whose dominance continues to grow and has already reached almost 60% of the volume of all DEXs. In second place is PancakeSwap, but its importance has consistently decreased throughout the year. This website is using a security service to protect itself from online attacks.

Buying and selling real estate often involves months of work, negotiations, filling out tedious forms, and paying substantial commissions. If a market for a digital asset is illiquid, investors and speculators would expect to see a wider bid-ask spread, making it more expensive to transact in that digital asset. The gap between the highest bid (selling) price and the lowest ask (purchasing) price in the order book is known as the bid-ask spread. We are seeing standardized futures markets pop up for Bitcoin and Ethereum.

Holding liquid crypto assets means that there is a stable market for the asset and subsequently fewer fluctuations in price, so traders can sell their assets at close to market price, with a reduced risk of slippage. On the other hand, if an asset is illiquid, traders can find themselves unable to sell their assets, or selling them at the current liquidity condition means selling them at a lower price than expected. This is used to gauge the liquidity of an exchange; an exchange with a higher liquidity is better to trade on since there are more market participants and trading activity in that exchange. All exchanges are ranked according to their volume, exchanges with greater volume equates to them being bigger in size. In the fast-paced cryptocurrency markets, liquidity is a vital concept that every trader or investor needs to fully grasp before making any investment decision.

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