Abstract
Bitcoin can be exchanged for other cryptocurrencies as well as for fiat currencies on many different platforms. Nevertheless, its real convertibility may be limited by market liquidity. The main aim of this article is to characterize and compare big and small bitcoin markets in terms of liquidity. I examine four platforms with high trade volume: Kraken, Bitstamp, BitFlyer and BTCBOX, as well as small entities which enable bitcoin to be traded in Polish zloty: BitBay and BitMarket. I compare the number of trades and the time between trades on selected bitcoin markets, determine the volume distribution throughout the day and analyse the dynamics of Amihud’s illiquidity measure – ILLIQ. I find that an exchange which is among the global leaders in terms of trading bitcoin in a particular traditional currency can be considered a smaller market in terms of trade volume in another traditional currency. Moreover, the results imply that BitBay and BitMarket can be perceived as local markets. They are mainly used for trading in Polish zloty, and are illiquid in terms of trading in the remaining traditional currencies. Home bias, the fact that they offer a possibility of trading in a less popular currency (in comparison to the world reserve currencies), and that have their interface in Polish, may give these platforms a competitive advantage.
Highlights
The fact that one exchange dominates in trading in a particular currency does not mean that it excels in terms of trading in other currencies as well. This is shown by the example of Kraken. It is highly active in trading bitcoin in EUR and U.S dollar (USD), it does not seem to be very liquid in terms of trading in Japanese yen (JPY)
I analysed liquidity patterns on different bitcoin exchanges, as liquidity is a factor of great importance for investors
Apart from the platforms which enable the investors to trade bitcoin in USD and EUR, I examined the markets where it is possible to trade in JPY and Polish bitcoin markets – BitBay (PLN)
Summary
Others view them as an invention used for money laundering or tax evasion and as a threat to financial stability Despite these ambiguous approaches, the popularity of cryptocurrencies has grown rapidly, resulting in an increase of trading volume and extensive media coverage. Its creator(s) envisaged bitcoin as a peer-to-peer version of electronic money which would enable online payments to be made via an electronic payment system based on cryptographic proof (instead of trust) and without financial intermediaries. This initiative led to the emergence of a whole ecosystem comprised of different participants (for example miners responsible for validating transactions, entities making and accepting bitcoin payments, bitcoin investors and cryptocurrency intermediaries) as well as their mutual interactions
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