Fragmented Liquidity Impacts Bitcoin Trading Costs

In recent years, trading Bitcoin and other cryptocurrencies has become a dynamic yet intricate endeavorMany might initially perceive the cost of such transactions as a straightforward calculation, yet the reality is far more complexVarious factors play into the pricing structures across different markets, which can lead to discrepancies that are often overlooked by casual traders.

At the heart of the matter lies the issue of dataUnlike traditional financial markets, where one can easily find a consolidated best buy and sell price, the cryptocurrency ecosystem lacks an authoritative benchmarkWith numerous trading venues ranging from centralized exchanges (CEXs) to decentralized exchanges (DEXs), the variety of sources provides conflicting price dataIt creates a landscape that is difficult for traders to navigate effectively.

Another factor contributing to these pricing deviations is opportunism among market agents

Many firms prioritize profit from order flow over achieving the best execution for their clients, leading to a situation where consumers may inadvertently incur higher costsA combination of these elements creates a complex and often misleading picture of what it truly costs to buy and sell cryptocurrencies.

Focusing on the costs associated with transactions between February and November 2023, a study sought to analyze the expenses incurred when purchasing Bitcoin at various levels—$25,000, $100,000, $250,000, $500,000, and $1,000,000. One prominent observation was that even small orders, such as those at $25,000, could see significant cost implications as a result of price discrepancies among exchangesThis phenomenon is reminiscent of what traditional markets refer to as "cross market" pricing—a rarity in most asset classes but a commonality in the world of cryptocurrencies

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These discrepancies often remain below the cost of transferring assets between exchanges to capitalize on arbitrage opportunities, yet during periods of heightened market volatility, these differences can become stark.

To address this challenge, the creation of the CoinRoutes Liquidity Index represents an effort to standardize data, providing traders a consistent and fair benchmark to assess liquidity costs effectivelyBy utilizing sophisticated methods of "smart routing" based on robust order book data from major exchanges, differences in transaction costs between various order sizes were measuredThe index is premised on an assumption of optimal routing, meaning that it operates under the idea that exchanges could transact seamlessly at any given moment.

The results produced from the CoinRoutes Liquidity Index between February and November 2023 are noteworthyWith Bitcoin and Ethereum being the primary focal points, the findings reveal several critical insights regarding the relative pricing structures when compared to global equity markets

For instance, institutional trading costs for Bitcoin and Ethereum remained competitive against similarly capitalized global stocks, which starkly contrasts with the heightened fees that retail investors faceUnlike traditional markets, where variances in bid-ask spreads are minimal, the cryptocurrency landscape showcases a different narrative.

When considering trading in US dollars versus USDT, the data indicated a telling trend: USD denominated transactions are generally more expensive than their USDT counterpartsAlthough this discrepancy has narrowed over the past year, the elevated costs of conducting transactions in fiat currency in comparison to stablecoins continue to be significant.

Breaking things down further, the average costs of liquidity for Bitcoin during the last quarter show an average rate between 5 to 7.5 basis points when trading fiat dollars for $1,000,000, while the equivalent trading with USDT ranged from 3.5 to 5.5 basis points

Ethereum followed a similar pattern, with costs hovering between 5 to 9 basis points for US dollar transactions and 4 to 8 basis points for USDT transactions.

Moreover, perpetual swap contracts stand out as a particularly liquid segment, exhibiting lower transaction costs than standard spot tradesThe surge in trading volumes witnessed in the swap market sheds light on why over-the-counter (OTC) trading is popular in contexts requiring immediate liquidity, as market makers can push tighter spreads in response to hedging behavior in the perpetual swap arena.

For Bitcoin, the average transactional cost for a $1,000,000 perpetual swap yielded figures ranging between 3.5 to 7 basis points when denominated in fiat currency, and 1 to 2.5 basis points when using USDTEthereum reflected parallel trends, with swap costs ranging from 4 to 8 basis points in USD and 2 to 3.5 basis points in USDT.

While evaluating the liquidity costs of trading $1,000,000 worth of Bitcoin on leading exchanges during the height of spring and early summer, spikes were noted particularly on weekends when bank issues complicated inter-exchange fund flows