Bitcoin liquidity in a market microstructure

Abstract

This master thesis investigates Bitcoin liquidity in a market microstructure setting and has been divided into two parts. In the first part we examine whether there is any correlation between the results generated by three liquidity measurement techniques (The Rolls, ILLIQ and Coefficient of elasticity) and the actual market microstructure spread. We find that only ILLIQ shows a moderate, statistically significant correlation with the spread. The second part investigates whether selected primary and secondary variables affect the spread and whether their relationship is in line with existing financial research and our intuition. This part also examines whether there is any weekly cyclicality in Bitcoin liquidity, and if occurrence of events affects Bitcoin liquidity or not. We find that the primary and secondary variables have a significant impact on the bid ask spread, and that the nature of the relationship is in line with empirical research and our intuition. Interestingly, we find that variables which are not directly related to the market microstructure have a relatively higher impact on the spread in comparison to variables that are directly related. We also find that Bitcoin liquidity does not have any cyclical, weekly trends and only a few of the events have any sort of significant impact on liquidity.