Bitcoin & Euro — a story of price discovery
Based on the market data that we dumped from Binance, Bitstamp, Coinbase and Kraken for the first week of June 2020, there is a clear leader that offers the deepest BTC/EUR liquidity. However, there are some details that should be considered when choosing a suitable trading venue.
Summary
- Those who look for deeper crypto liquidity must look not at trading volume but the other liquidity metrics
- BTC/EUR may appear a mature market with certain liquidity metrics smoothly fluctuating around its average values when the market is calm
- However, the price shock on the 2nd of June has shown that the on-exchange liquidity is fragile that resulted in wider spreads and less depth across all observed exchanges
- Kraken had the deepest BTC/EUR liquidity during the observed period for both retail/B2C and B2B market participants
- Bitstamp has better liquidity for the execution of big orders while other liquidity metrics are comparable with those of Coinbase Prime. Binance is lagging behind.
Liquidity metrics
Although there is a number of different liquidity metrics (read more in our previous research), we have focused on the major 3 ones that, in our opinion, give a good idea of what BTC/EUR liquidity on a particular exchange is:
- Bid-ask spread (BAS) by 0.1 BTC, %
- Bid-ask spread by 10 BTC, %
- Handy liquidity by 0.5%, BTC
We have calculated two values of those metrics:
- The average value
- 95th percentile, which means that bid-ask spread is not wider or that handy liquidity is not smaller than the indicated value
Your liquidity needs
Depending on whether you are a digital assets investor, speculative trader or hedger, your liquidity needs vary. We have tried to design a simple framework for the classification of market participants. It must be said that we consider the needs only of market takers (i.e., liquidity consumers). We have identified 2 main properties of takers (thus, dividing them into 4 categories):
- the nature of flow: retail or corporate/HNWI
- the regularity of flow: regular or sporadic
We assume that
- BAS by 0.1 BTC is useful for retail traders and for B2C companies with retail client flow (average trade amount is up to 1000 EUR)
- BAS by 1 BTC and Handy Liquidity by 0.5% are more relevant for companies with corporate or HNWI client flow (average trade amount is ca. 100 000 EUR)
- The average value is useful for traders with continuous client flow (e.g., 100 trades per day)
- 95th percentile is useful for traders with sporadic client flow (e.g., 1–10 trades per day)
Fees
We have already written about the various transaction costs that a market participant must bear in mind. Trading fees are one of the most important factors that impact the final net price of a purchased or sold asset. In cryptocurrency markets, many crypto exchanges traditionally offer a tiered fee schedule that depends on the trading volume for the last 30 days. In addition, most exchanges offer different maker (for passive orders) and taker (for aggressive orders) fees. We have calculated liquidity metrics for 3 taker fee levels: 0% fee, basic fee (if the 30-day volume is $0), $10M fee (if the 30-day volume exceeds $10M). The values are valid as of 10-Jun-2020. Exchanges are sorted alphabetically.
Although we do not cover the impact of withdrawal fees, companies with the retail flow and limited own inventory must pay special attention to the level of withdrawal fees if they require (almost) instant delivery of an asset.
Results
According to the calculated statistics, Kraken had the deepest BTC/EUR liquidity during the observed period. Regardless of small or big liquidity needs, basic or more advanced fee level, Kraken seems to be a clear frontrunner.
Binance, which has recently added EUR-instruments, was still lagging behind three other exchanges.
Although Bitstamp and Coinbase have comparable liquidity overall offering, the former had significantly higher handy liquidity — the readiness of a market participant to pay 0.5% more for buying or getting 0.5% less for selling would result in around 1.3–1.4 times higher number of bitcoins being respectively bought or sold. Please also note that in case of Bitstamp a 10M taker fee is already available when the 30-day volume exceeds $4M, which might be important for smaller traders ($4M 30-day volume on Coinbase corresponds to 0.18% fee).
Charts
Price shock
On June 2, 2020, the bitcoin price was initially pumped by circa 6-7% and several hours later dumped by 6-7%.
The cumulative trading volume on 4 exchanges in question was around 53k BTC in BTC/USD(T) pairs and 7k BTC in BTC/EUR during 1 hour of the dump phase. It means that to increase a bitcoin price by 7% a market manipulator would need just $60M (if the entire trading universe was limited to the 4 observable exchanges).
It is worth looking at the trading imbalance, which is a difference between the cumulative sell and buy volume (if an aggressive order was a buy order, a deal is considered to be a buy trade).
During the pump phase, the 10 BTC spread has increased 2–3 times to almost 0.5% on Kraken and 1% on Bitstamp and Coinbase. The dump phase was even more dramatic. The 10 BTC spread has increased 5 times to almost 0.7% on Kraken and 1.5% on Bitstamp and Coinbase; cumulative handy liquidity has decreased from around 340 to 70 BTC (an equivalent of only 600k EUR). It seems that the efforts taken by the exchanges such as dedicated market making program are far from being sufficient.
Methodology
Data
We have dumped market data via WebSockets API connecting directly to the aforementioned crypto exchanges.
We have dumped N levels of an order book where N depends on an exchange:
- Binance 20
- Bitstamp 100
- Coinbase 150
- Kraken 100
NB: there is a potential flaw in the statistics based on the data from Binance due to the small number of levels, although our estimation that the impact is not significant. This is the limitation of using Partial Book Depth Streams (see Binance API).
The dumped period: 2020–06–01 00:00:00.000 — 2020–06–07 23:59:59.999 UTC
Charts
To make the visualisation more user friendly, we have calculated the average value of a specific metric for the 5-minute windows.
Liquidity metrics
- Best bid-ask spread = [best ask — best bid] / best ask
- Bid-ask spread by 10 BTC = [the weighted average price of 10 BTC for sale — the weighted average price of 10 BTC for purchase] / the weighted average price of 10 BTC for sale
- Handy liquidity by X% is the cumulative size of an asset in an order book at levels remote from the mid-market price by X% or less
About the authors: Ilia Drozdov, CFA, has a master degree in financial economics and is a co-founder of a fintech startup Finery Tech. Yuriy Bogdanov has a master degree in applied mathematics and physics and is a leading data scientist.
Finery Tech is a technology vendor focusing on creating non-custodial trading solutions that provide for reduced execution costs and lower counterparty risk. For more information visit our website and follow us on Twitter or LinkedIn.
