Author: Crypto Research
Translated by: Luffy, Foresight News
What are the costs of trading Bitcoin and other crypto assets? This question sounds simple, but in reality, most markets today overlook other participants, and trading prices often differ from what is displayed on other markets. The reasons for this phenomenon are multiple:
Lack of data: Cryptocurrencies lack an “official” comprehensive best bid and offer (BBO).
Market fragmentation: The crypto market has many trading platforms, including centralized exchanges (CEX), liquidity providers (LP) and decentralized exchanges (DEX), and price oracles often conflict with each other.
Opportunism: Many market agents overlook the responsibility of ensuring the “best execution” for their clients and instead profit from order flow payments (PFOF) and reduce costs.
The chart below shows the costs of buying and selling Bitcoin in US dollars from February to November 2023 for $25,000, $100,000, $250,000, $500,000, and $1,000,000:
From this chart, it can be observed that small order costs of $25,000 persist due to price discrepancies between exchanges, with one exchange’s bid usually being higher than the ask. Traditional financial markets call these “cross markets”, which are rare in most asset classes but almost always present in crypto assets. It is worth noting that most of the time, these differences are lower than the cost of transferring assets between exchanges and arbitraging to eliminate discrepancies. However, in periods of high market volatility, more significant differences typically exist. These price discrepancies can distort perceptions of potential trading costs. Therefore, we created the CoinRoutes Liquidity Index to standardize data and provide traders with a consistent and fair benchmark to understand liquidity costs.
We measured the cost differences between $25,000 and $1,000,000 orders using the best “smart routing” for each scale. This was calculated by “walking the order book”, where we kept complete order books from all major exchanges. The order book was used to add up the selling cost of all bids, arranged in descending order to accumulate $1,000,000 in sales, and the buying cost of all asks, arranged in ascending order to accumulate $1,000,000 in purchases. We then calculated a time-weighted average from a 5-second sample each day. It is worth noting that this benchmark assumes the best order routing, meaning it assumes that all exchanges are available for trading at all times and have sufficient inventory of US dollars, stablecoins, or cryptocurrencies. In reality, this requires sophisticated routing technology and excellent fund management.
The results of the CoinRoutes Liquidity Index are:
We calculated the indices for Bitcoin and Ethereum perpetual swap contracts priced in US dollars and USDT from February to the end of November 2023 and drew several conclusions:
1) If institutions can access all markets, then institutional-sized Bitcoin and Ethereum trading costs are competitive compared to similarly sized global stocks. (Retail investors pay much higher fees for Bitcoin and Ethereum, unlike the situation in the stock market, where the price differences paid by different traders are minimal.)
2) Trading spot contracts in dollars is more expensive than trading in USDT. Although this trend has eased over the past year, it is still significant.
For Bitcoin, the average cost of $1,000,000 liquidity in dollars ranged from 5 to 7.5 basis points in the past quarter, while the average cost of $1,000,000 liquidity in USDT ranged from 3.5 to 5.5 basis points.
For Ethereum, the average cost of $1,000,000 liquidity in dollars ranged from 5 to 9 basis points in the past quarter, while the average cost of $1,000,000 liquidity in USDT ranged from 4 to 8 basis points.
3) Perpetual swap contracts have stronger liquidity and lower trading costs. This is not surprising, as the trading volume in the futures market is significantly higher than in the spot market. This also explains why over-the-counter trading is so popular in the spot market, as market makers can hedge in the perpetual swap market to create tight spreads.
For Bitcoin, the average cost of $1,000,000 liquidity in perpetual swaps was: 3.5 to 7 basis points for contracts priced in dollars and 1 to 2.5 basis points for contracts priced in USDT.
For Ethereum, the average cost of $1,000,000 liquidity in perpetual swaps was: 4 to 8 basis points for contracts priced in dollars and 2 to 3.5 basis points for contracts priced in USDT.
The above chart shows the liquidity costs of buying or selling $1,000,000 worth of Bitcoin in US dollars on major cryptocurrency exchanges. Please note that in the spring and early summer, liquidity costs peaked, mainly on weekends, when banking issues made transferring funds across exchanges difficult, but the average cost has remained stable at 5 to 7.5 basis points. Since this is an index measuring the cost of each item, it means that the average bid-ask spread for dollar-based liquidity ranges from 10 to 15 basis points.
In conclusion, achieving best execution in decentralized cryptocurrency markets requires facing many challenges, including price differences between different exchanges and opportunistic behavior by market participants.
