The Curious Case of Liquidity Constraints: Cryptocurrency vs. FX

Liquidity constraints are much more prevalent in cryptocurrency than they are in FX.

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.

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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.

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