The Curious Case of Liquidity Constraints: Cryptocurrency vs. FX

Monday, 05/01/2015 | 04:08 GMT by Antony Lewis
  • Liquidity constraints are much more prevalent in cryptocurrency than they are in FX.
The Curious Case of Liquidity Constraints: Cryptocurrency vs. FX
FM

Liquidity constraints are much more prevalent in cryptocurrency than they are in FX. Bitcoin’s all-time cumulative exchange-traded volume is around USD 5 billion, whereas FX has trading volume of a few trillion dollars every day. Hence, the Bitcoin market is still relatively immature and transacting in large sizes will easily move the market, leading to cries of manipulation.

For other cryptos, the level of liquidity differs depending on the cryptocurrency in question and the fiat currency it is trading against. Bitcoin accounts for 95% of the total volume of Cryptocurrencies traded - other cryptocurrencies like dogecoin and litecoin face even more liquidity constraints than bitcoin. In terms of currency pairs, USD is the most commonly traded currency, followed by CNY and EUR. Those looking to exchange bitcoin for Japanese yen or Polish zloty, for example, will face much higher liquidity constraints than if they exchange with USD.

The ecosystem is starting to grow up, though. Every day we are seeing new brokers and exchanges willing to put up a bit of risk to participate in the money flow. This results in a systemic move towards thicker order books, tighter spreads and better price discovery.

Liquidity constraints are much more prevalent in cryptocurrency than they are in FX. Bitcoin’s all-time cumulative exchange-traded volume is around USD 5 billion, whereas FX has trading volume of a few trillion dollars every day. Hence, the Bitcoin market is still relatively immature and transacting in large sizes will easily move the market, leading to cries of manipulation.

For other cryptos, the level of liquidity differs depending on the cryptocurrency in question and the fiat currency it is trading against. Bitcoin accounts for 95% of the total volume of Cryptocurrencies traded - other cryptocurrencies like dogecoin and litecoin face even more liquidity constraints than bitcoin. In terms of currency pairs, USD is the most commonly traded currency, followed by CNY and EUR. Those looking to exchange bitcoin for Japanese yen or Polish zloty, for example, will face much higher liquidity constraints than if they exchange with USD.

The ecosystem is starting to grow up, though. Every day we are seeing new brokers and exchanges willing to put up a bit of risk to participate in the money flow. This results in a systemic move towards thicker order books, tighter spreads and better price discovery.

Topics
bitcoin
About the Author: Antony Lewis
Antony Lewis
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Antony runs Business Development at itBit, a Virtual Currencies (Bitcoin) Exchange based in Singapore. He brings to Bitcoin ten years of experience from the City. His previous roles at leading investment banks include market-making in FX as a G10 spot trader in London for Barclays Capital, and building FX trading software at Credit Suisse for the Sales and Trading functions. Before that Antony was a business strategy consultant at OC&C Strategy Consultants. Antony received his BA and MA in Natural Sciences from Cambridge University (Gonville & Caius College). Antony runs Business Development at itBit, a Virtual Currencies (Bitcoin) Exchange based in Singapore. He brings to Bitcoin ten years of experience from the City. His previous roles at leading investment banks include market-making in FX as a G10 spot trader in London for Barclays Capital, and building FX trading software at Credit Suisse for the Sales and Trading functions. Before that Antony was a business strategy consultant at OC&C Strategy Consultants. Antony received his BA and MA in Natural Sciences from Cambridge University (Gonville & Caius College).

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