New paper stuying liquidity on cryptocurrency markets

Post date: Apr 21, 2020 1:28:15 PM

The liquidity of cryptocurrency trading platforms has yet to gain significant attention in the academic literature, especially regarding long-term timeframes. The paper “What Drives the Liquidity of Cryptocurrencies? A Long-Term Analysis” by FiRe members Alexander Brauneis, Roland Mestel and Erik Theissen bridges this gap by analyzing the liquidity of four major cryptocurrencies (Bitcoin, Ethereum, Litecoin and Ripple) on four large trading venues (Bitfinex, Bitstamp, Coinbase Pro and Kraken) over a four-year period.

Referring to another of their working papers (“How to Measure the Liquidity of Cryptocurrencies?”) in which the authors run horse races of various low-frequency measures to identify the best liquidity proxy for cryptocurrency research, Alex, Roland, and Erik estimate the Abdi and Ranaldo (2017) spread estimator from hourly transactions data and compare liquidity across cryptocurrencies and exchanges. In order to identify the drivers of cryptocurrency liquidity the authors analyse a broad set of explanatory variables from general financial markets and global cryptocurrency markets as well as variables specific to each exchange-currency pair. The authors find that the volatility of cryptocurrency returns as well as the dollar trading volume and the number of transactions are the most important determinants of liquidity. Surprisingly, general financial market variables have no explanatory power.

Cover, Finance Research Letters

The paper was presented at the FiRe Research Day in December 2019 and has recently been accepted for publication in Finance Research Letters.

Brauneis, A., Mestel, R., Theissen, E., Forthcoming. What Drives the Liquidity of Cryptocurrencies? A Long-Term Analysis, Finance Research Letters, DOI: 10.1016/j.frl.2020.101537.