How much does it cost to trade Bitcoin with market liquidity dispersed

Original author: Crypto Research
Translated by: Luffy, Foresight News
What is the cost of trading Bitcoin and other cryptocurrencies? This question may sound simple, but in reality, most markets currently overlook other participants, and trading prices often differ from what is displayed in other markets. There are several reasons for this phenomenon:
Lack of data: Cryptocurrencies do not have an “official” comprehensive best bid and offer (BBO).
Market fragmentation: There are many cryptocurrency trading markets, including centralized exchanges (CEX), liquidity providers (LP), and decentralized exchanges (DEX), and price oracles conflict with each other.
Opportunism: Many market agents overlook their responsibility for the “best execution” of clients, opting instead to profit from order flow payments (PFOF) and reducing costs.
The chart below shows the cost of buying and selling Bitcoin in USD from February to November 2023, for amounts of $25,000, $100,000, $250,000, $500,000, and $1,000,000:


From the chart, it can be observed that there is a persistent small cost for the $25,000 orders, caused by the price differences between exchanges, where one exchange’s offer is usually higher than the quote. 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 arbitrage to eliminate differences. However, during times of high market volatility, there are usually more significant differences. These price differences can distort the view 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 difference between $25,000 and $1,000,000 orders based on the best “smart routing” for each scale. This was calculated by “traversing the order book,” which we maintain for all major exchanges. The order book was used to sum the selling costs of all bids, arranged in descending order to accumulate $1,000,000 in sales, and the buying costs of all bids, arranged in ascending order to accumulate $1,000,000 in purchases. We then computed the 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 always available for trading and have sufficient USD, stablecoins, or cryptocurrency inventory. In reality, this requires complex routing technology and excellent fund management.
CoinRoutes Liquidity Index Results:
We calculated the index for Bitcoin and Ethereum perpetual swap contracts priced in USD and USDT from February to the end of November 2023, and we drew several conclusions:
1) If institutions can access all markets, the cost of trading Bitcoin and Ethereum at an institutional scale is quite competitive compared to global stocks of similar market value. (Retail investors pay much higher fees for Bitcoin and Ethereum, which is in stark contrast to the stock market, where the spread paid by different traders is very small).
2) Trading USD spot is more expensive than trading USDT spot. Although this trend has eased over the past year, it is still significant.
For Bitcoin, the average cost of $1,000,000 liquidity in USD 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 USD 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 swap 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 is: the cost of swaps priced in USD ranges from 3.5 to 7 basis points, while the cost of swaps priced in USDT ranges from 1 to 2.5 basis points.
For Ethereum, the average cost of $1,000,000 liquidity in perpetual swaps is: the cost of swaps priced in USD ranges from 4 to 8 basis points, while the cost of swaps priced in USDT ranges from 2 to 3.5 basis points.
The chart above shows the liquidity costs of buying or selling $1,000,000 worth of Bitcoin in USD on major cryptocurrency exchanges. It is worth noting that liquidity costs peaked in the spring and early summer, mainly on weekends, when banking issues made transferring funds across exchanges difficult, but the average cost has stabilized at 5 to 7.5 basis points. As this is a measure of each cost, it means that the average bid-ask spread for USD-based liquidity ranges from 10 to 15 basis points.
In conclusion, achieving best execution in decentralized cryptocurrency markets presents many challenges, including price differences between different exchanges and opportunistic behavior by market participants.