There was a time when getting in and out of a large cryptocurrency trade was quite costly, but it is no longer costing as much on crypto exchanges like BitMEX or Binance. This could be a healthy sign that cryptocurrency markets are now maturing. Binance is the biggest crypto exchange in the world by trading volume. On Monday, the exchange saw a decline of 0.25% in the daily average spread of the buy and sell orders of Bitcoin futures that had a $10 million quote. According to Skew, a research firm, this is a record low. During the crash that happened in March, the spread had increased to 7.95%, but it has been following a declining trend since then.
The bid/offer spread refers to the difference between the best available price for buying or selling something in a market. Essentially, it is a representation of liquidity i.e. the degree to which you quickly buy or sell an asset in a marketplace for a stable price. If the spread is getting narrower, it means that the market is deeper and there is a substantial number of open orders, allowing buyers and sellers to execute trades without causing big changes in the price. As opposed to this, large orders in a weak liquidity environment cause prices to move, which can increase the cost of executing trades.
Hence, it can deter traders, particularly institutions, and cause the liquidity to decline even further. Therefore, it is undoubtedly a healthy market development that record low spreads are being offered by Binance and BitMEX on a $10 million quote. According to experts, tighter spreads means that the order book will be deeper and this will allow the market to withstand shocks that occur due to price volatility, easily. Binance and BitMEX are not the only ones that also seen a steady decline in the spread in the last five months, as other exchanges have reported the same.
Spreads on FTX and Deribit have also declined after reaching highs in March, but they are still higher than the spreads on BitMEX and Binance. One possible explanation for the decline in spreads exchange-wide could be the rally in Bitcoin’s price. Higher prices are known to contribute to higher liquidity as well. The bid/offer spread on BitMEX reduced to a low of 0.17% on 18th July and was last set at 0.25%. Before the March crash, the spread on Binance had been higher than BitMEX. However, the spreads have converged since then and are now moving in tandem.
Some were of the opinion that BitMEX’s lead had declined over other exchanges due to reputational risk, as there had been a host of tech issues and outages earlier this year. On March 13, the Seychelles-based exchange had suffered from an aggressive DDoS attack, which prevented and delayed requests to the platform. The outage had been blamed for increasing price volatility. Another outage happened in May, but it didn’t cause any panic in the market. The low bid/offer spreads on these two exchanges are a welcome development because it means that they are more capable of dealing with volatility shocks than they were before.
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