In pursuit of better BTC/EUR rates

While cryptocurrency markets are still fragmented, failure to find a good solution that provides for low transaction cost, low counterparty risk and abundant liquidity might pose a threat to the prosperity of your business. Working with liquidity providers (LPs) rather than with a single crypto exchange might be a solution.

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  • Thorough transaction costs analysis is a must for active trading participants, as transaction costs badly impact overall profitability

Transaction costs

Transaction costs are additional expenses paid when buying or selling a financial asset. They may include:

  • bid-ask spread

Transaction costs decrease the profit margin of your business. All else being equal, one should seek trading and hedging solutions with lower transaction costs and a greater variety of options how transaction costs can be minimized (e.g., an ability to use various banking partners when settling a fiat-to-crypto transaction).

Counterparty risk

Counterparty risk is the probability that the trading party will be unable (or reluctant) to fulfil its contractual obligations such as making payment upon a deal or release assets, which belong to its clients. There have been a number of cases when a cryptocurrency exchange became insolvent and its users lost a part or all of their funds. As the crypto industry is yet to mature, the participants lack the necessary reputation; besides, poor regulation and legal framework make it challenging to enforce what is written in agreements especially given the global nature of the cryptocurrency market. Thus, counterparty risk is still a major concern among the market participants.

Finery Tech has addressed this issue in its flagship product Finery eFX, which is a non-custodial peer-to-peer technological solution that allows market participants to trade only with those counterparties that they trust without keeping any funds with third parties.

Liquidity explained

The term liquidity has two main meanings:

  • Liquidity is liquid assets owned by a firm such as cash or an equivalent that can be easily converted into cash

In our article, we focus on the second meaning. Liquidity indicates how easy a financial asset can be sold or bought at the current market price (that is with less market impact). Although many people look only at trading volume, it might not be enough. Therefore, there is a number of metrics that help measure the liquidity of an asset. Here is a few of them:

  • Turnover for a period (i.e., trading volume)

Sophisticated liquidity providers that aggregate liquidity take into account these and other metrics and calculate them across all available instruments (e.g., ETH/USD, ETH/EUR and ETH/BTC) and across all connected exchanges where this asset is listed. It gives them the advantage to hedge their risk (i.e., source liquidity) only on those venues with better and/or unique liquidity, thus, giving better rates for the end customer.

D.I.Y. or turn to LP?

People may wonder why they need to work with a liquidity provider if they can connect to several exchanges, implement a simple version of smart order routing and source liquidity themselves. Well, it is indeed possible but it has some drawbacks:

  • required due diligence on every connected exchange including liquidity analysis as well as the estimation of a counterparty risk

BTC/EUR: Bitstamp, Coinbase, Kraken

We have done small research to compare BTC/EUR liquidity on leading cryptocurrency exchanges Bitstamp, Coinbase, and Kraken for the period from 2020–05–11 to 2020–05–17. To this end, we have dumped market data using WebSockets API and calculated average values of the following metrics:

  1. Best Bid-Ask Spread, % (= [best ask - best bid] / best ask)
Best Bid-Ask Spread, %, for BTC/EUR (Bitstamp, Coinbase, Kraken). Source: Finery Tech
Best Bid-Ask Spread by 10 BTC, %, for BTC/EUR (Bitstamp, Coinbase, Kraken). Source: Finery Tech
Handy liquidity, BTC, for BTC/EUR (Bitstamp, Coinbase, Kraken). Source: Finery Tech

Based on the analysed data, the best liquidity in BTC/EUR is offered by Kraken. Comparing the laggards, Coinbase has narrower bid-ask spreads, while Bitstamp has deeper liquidity close to the midmarket. The trading volume corresponds to this inference.

Daily trading volume for BTC/EUR. Source: bitcoinity

Finery eFX is a B2B non-custodial trading platform with customizable crypto liquidity and post-trade peer-to-peer settlement that provides for reduced execution costs and lower counterparty risk. For more information visit our website and follow us on Twitter or LinkedIn.

Finery Markets is the first global crypto-native Multi-Dealer Platform. Powered by proprietary matching engine for best liquidity & execution quality.