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Title: Spot Trading in USD Costs More Than USDT
Article by: Crypto Research
Translated by: Luffy, Foresight News
Trading Bitcoin and other cryptocurrencies – what is the cost? This question may seem simple, but the reality is different. Currently, most markets overlook other participants, resulting in prices that are often higher or lower than what other markets display. There are several reasons for this phenomenon:
Lack of data: Cryptocurrencies do not have an “official” Best Bid and Offer (BBO) comprehensive price.
Market fragmentation: Cryptocurrency trading markets are diverse, including centralized exchanges (CEX), liquidity providers (LP), and decentralized exchanges (DEX), with conflicting price oracles.
Opportunism: Many market intermediaries neglect their responsibility for “best execution” for clients and instead profit from Payment for Order Flow (PFOF) and reduce costs.
The chart below shows the costs of buying and selling Bitcoin in USD for amounts of $25,000, $100,000, $250,000, $500,000, and $1,000,000 from February to November 2023:
From this chart, it can be seen that there are small costs for $25,000 orders that persist due to price differences between exchanges, where one exchange’s bid 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 arbitraging the differences. However, during periods of high market volatility, more significant differences are usually present. These price differences can distort the perception of potential trading costs. Therefore, we 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 differences between $25,000 and $1,000,000 orders using the best “smart routing” between the orders’ books. We maintain complete order books from all major exchanges. The calculations involve adding up the sell costs of all bids in descending order to accumulate $1,000,000 in sales and the buy costs of all bids in ascending order to accumulate $1,000,000 in purchases. Then, we calculate 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 available for trading at any time and have sufficient USD, stablecoins, or crypto inventory. In reality, this requires sophisticated routing technology and excellent fund management.
Results from the CoinRoutes Liquidity Index:
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 drew several conclusions:
1) If institutions can access all markets, the trading costs of institutional-sized Bitcoin and Ethereum are competitively comparable to similarly market-capitalized global stocks. (The fees paid by retail investors for Bitcoin and Ethereum are much higher, unlike the stock market where the price differences paid by different traders are very small.)
2) Spot trading in USD is more expensive than spot trading in USDT. Although this trend has eased in the past year, it is still significant.
For Bitcoin, in the past quarter, the average cost of $1,000,000 liquidity in USD ranged from 5 to 7.5 basis points, while the average cost of $1,000,000 liquidity in USDT ranged from 3.5 to 5.5 basis points.
For Ethereum, in the past quarter, the average cost of $1,000,000 liquidity in USD ranged from 5 to 9 basis points, 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 futures market is significantly higher than the spot market. This also explains why over-the-counter trading is 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 in USD ranges from 3.5 to 7 basis points, and the cost 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 in USD ranges from 4 to 8 basis points, and the cost 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. Please note that liquidity costs peaked during the spring and early summer, mainly on weekends when banking issues made fund transfers between exchanges difficult. However, the average costs remained stable at 5 to 7.5 basis points. As this is an indicator measuring 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 poses numerous challenges, including price differences between different exchanges and opportunistic behavior by market participants.
Tags: Ethereum, payment, Bitcoin, order book
Source link:
https://foresightnews.pro/article/detail/62907
Note: The views expressed in the Bitpush articles represent the author’s opinion and do not constitute investment advice.
Original article link:
https://www.bitpush.news/articles/6907635
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