Original author: Crypto Research

Original text compilation: Luffy, Foresight News

What is the cost of trading Bitcoin and other encryption assets? This question sounds simple, but in fact, most of the current market ignores other participants, and the transaction price is often higher or lower than the price displayed in other markets. There are multiple reasons for this phenomenon:

• Lack of data: Cryptocurrency does not have an "official" best bid and offer (BBO) price.
• Market decentralization: Cryptocurrency trading markets are diverse, including centralized exchanges (CEX), liquidity providers (LP), and decentralized exchanges (DEX), with conflicting price oracles.
• Opportunism: Many market intermediaries overlook their duty of 'best execution' to clients, instead profiting from payment for order flow (PFOF) and lowering costs.

The chart below shows the cost of purchasing and selling BTC in USD from February to November 2023 for $25,000, $100,000, $250,000, $500,000, and $1,000,000.

From this chart, it can be seen that there is a small cost of 25,000 US dollars for the continued existence of orders, which is caused by the price difference between exchanges, where one exchange usually offers higher than the quoted price. Traditional financial markets call these "cross markets", which are very 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 periods of high market volatility, there are usually more obvious differences. These price differences can lead to a distorted view of potential trading costs. Therefore, we have created the CoinRoutes liquidity index to standardize data and provide traders with a consistent and fair benchmark for understanding liquidity costs.

We measured the cost difference between $25,000 orders and $1 million orders based on the best 'smart routing' for each scale. This was calculated by 'traversing the order book', and we keep complete order books of all major exchanges. When calculating, the order book is used to add up the selling costs of all bids, arranged in descending order to accumulate $1 million in sales, as well as the buying costs of all bids, arranged in ascending order to accumulate $1 million in purchases. Then, we calculate the time-weighted average from a 5-second sample every day. It is worth noting that this benchmark assumes the best order routing, which means it assumes that all exchanges can trade at any time and have sufficient inventory of dollars, stablecoins, or cryptocurrencies. In reality, this requires sophisticated routing technology and excellent fund management.

CoinRoutes Liquidity Index Results:

We calculated the indices of perpetual swap contracts for Bitcoin and Ethereum priced in USD and USDT from February to November 2023, and drew several conclusions:

1）If institutions can enter all markets, then the transaction costs of Bitcoin and Ethereum at the scale of institutions are quite competitive compared to the similar market capitalization of global stocks. (The fees paid by retail investors in Bitcoin and Ethereum are much higher, which is quite different from the situation in the stock market, where the price difference paid by different traders is very small)

2. Spot trading in USD is more expensive than spot trading in USDT. Although this trend has eased over the past year, it is still significant.

For Bitcoin, in the past quarter, the average cost of 1 million dollars liquidity in USD is between 5 and 7.5 basis points, while the average cost of 1 million dollars liquidity in USDT is between 3.5 and 5.5 basis points.

For Ethereum, in the past quarter, the average cost of $1 million in liquidity in USD ranged from 5 to 9 basis points, while the average cost of $1 million in liquidity in USDT ranged from 4 to 8 basis points.

3. Perpetual swap contracts are more liquid and have lower transaction costs. This is not surprising, as the trading volume in the swap market is significantly higher than that 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 perpetual swap with a liquidity of 1 million US dollars is: the cost of swap denominated in USD is between 3.5 and 7 basis points, and the cost of swap denominated in USDT is between 1 and 2.5 basis points.

For Ethereum, the average cost of a perpetual swap with a liquidity of 1 million US dollars is: the cost of the swap in USD is between 4 and 8 basis points, and the cost of the swap in USDT is between 2 and 3.5 basis points.

The chart above shows the liquidity cost of buying or selling 1 million dollars worth of Bitcoin on major cryptocurrency exchanges. Note that liquidity costs peaked in the spring and early summer, primarily on weekends when banking issues made fund transfers across exchanges difficult, but the average cost has stabilized between 5 and 7.5 basis points. As a measure of each cost, this implies an average bid-ask spread of 10 to 15 basis points for liquidity denominated in dollars.

In short, to achieve best execution in the fragmented cryptocurrency market, there are many challenges to face, including price differences between different exchanges and opportunistic behavior by market participants.