The Determinants of Bitcoin Liquidity

Abstract

Liquidity is one of the most important characteristics of an asset. While it has been studied extensively in conventional markets, little research has been done on the liquidity of bitcoin markets. We investigate determinants of liquidity in the bitcoin markets, both on an hourly and a daily basis. As a measure of liquidity, we use the bid-ask spread, calculated from high-frequency data from four different exchanges located around the world. We find that contemporaneous traded volume and volatility are positively related with the bid-ask spread. We also find that high absolute returns predict high bid-ask spread in the next period. Our findings indicate that bitcoin market makers tend to increase the bid-ask spread in more uncertain times and that higher traded volume can be interpreted as new information arriving in the market.