Binance’s Bitcoin ‘Bid-Ask Spreads’ Constrict as Cryptocurrency Marketplaces Matured

By Ritwik

Getting in & out of a considerable bitcoin trade on cryptocurrency exchanges like Binance or BitMEX is not priced as much as it used to. That might be a vital sign that digital-asset markets are maturing. At Binance, the world’s prime cryptocurrency exchange by trading volume, the average daily spread between buying & sell orders on bitcoin futures for $10 million quote size deteriorated to a record low of 0.25% on Monday, conferring to data provided by research firm Skew. The spread, which characteristically narrows as an exchange’s order book depth increases, spiked to 7.95% during the March crash but dropped just after. It has been in a deteriorating trend ever since. The so-called bid/offer spread is the variance between the best accessible value to sell or buy something in a market. It fundamentally characterizes liquidity – the degree to which an asset can be speedily bought or sold on a marketplace at stable prices.

A slenderer spread implies a more in-depth market where there is a sufficient volume of open orders so buyers & sellers can execute a trade without causing a significant change in the price. That’s in contrast to a feeble liquidity environment, where large orders tend to move the price, growing the cost of executing trades, & deterring traders – especially institutions – and, in turn, causing a further decline in liquidity. Binance & BitMEX offering record low spread on a $10 million quote is healthy market development, conferring to Denis Vinokourov, head of research at London-based crypto prime broker Bequant.

“The tighter the spread, the deeper the order book, the more the market can withstand shocks [price volatility],” Vinokourov told CoinDesk in a Telegram chat.

BitMEX & Binance aren’t alone as other exchanges have also witnessed a steady drop in spreads over the past five months. Spreads on Deribit & FTX have also declined from March highs but remain considerably higher than those on BitMEX & Binance. Bitcoin’s value rally may be one conceivable explanation for the exchange-wide decline in spreads.

“Higher liquidity is largely a function of prices being higher,” said Richard Rosenblum, co-founder at GSR, a digital assets trading firm. “At the $12,000 price range, if you have the same amount of tokens on the bid/offer, that’s three times as many dollars as $4,000 BTC, resulting in much tighter spreads.”

Spread compressions in more than a few markets

The bid/offer spread on perpetual (futures without expiry) listed on BitMEX fell to a lifetime low of 0.17% on July 18 & was last realized at 0.25%. Binance repeatedly offered a higher spread than BitMEX earlier the March crash. Since then, however, the spreads have converged & pretty much stirred in tandem.

“Bitmex’s lead has reduced over other exchanges, largely due to reputational risk, following a raft of outages & tech issues earlier in the year,” said Vinokourov.

Seychelles-based BitMEX agonized an aggressive DDoS attack on March 13, which delayed & prevented requests to the platform. The outage was widely censured for bolstering price volatility. It agonized another outage in May, but that did not create panic in the market.

Sign of healthier market

An essential driver of order book depth or liquidity is the rate of change in values. In times of extreme price volatility, binges tend to widen & exchanges’ ability to execute large orders is reduced. For example, the spread for a $10 million quote on BitMEX, one of the largest derivatives exchanges by open interest, rose to 4.07% from 1.3% on March 13 – the day when bitcoin’s value crashed by 40%. Like spikes were detected on other exchanges in mid-March.

Exchanges that are professed to lack order book depth are often worst hit during times of panic. That’s because both buyers & sellers fear that their trade will distort prices on an illiquid exchange. Sellers, consequently, leave offers at a discount to the fair price & buyers leave orders at a premium. That leads to supplementary widening of the bid/offer spread & overstated price moves. In other words, weak liquidity begets illiquidity. Therefore, the record low bid/offer spreads on Binance & BitMEX are a welcome development; the exchanges have a more extraordinary ability to face volatility shocks than they did before the March crash. 

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