Abstract
We study bitcoin to US dollar (BTCUSD) liquidity and liquidity determinants using order book data from three large cryptocurrency exchanges. The BTCUSD market is more liquid than US equity markets with bid–ask spreads often below 1 basis point. We find that BTCUSD liquidity is largely explained by same-exchange past liquidity, past cryptocurrency market-wide liquidity and volatility, and fees charged on the blockchain for bitcoin transfers. Surprisingly, we find that BTCUSD liquidity is unrelated to broader financial markets and financial market liquidity. • Cryptocurrency liquidity is unrelated to broader financial markets. • Liquidity is related to activity on the Blockchain and cryptocurrency exchange specific conditions. • Bid–ask and effective spreads on cryptocurrency exchanges are significantly narrower than in equity or bond markets, and comparable to foreign exchange markets.
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