The digital asset industry put its best foot forward at the start of 2020.After witnessing a collective bullish rally, which saw Bitcoin surge up to $10,145 by February 2nd week. Since then, however, an unexpected slump has sparked a series of misfortunes for the biggest digital asset, as on 12 March BTC succumbed to $3800.
In order to understand market conditions, analysis of the bid-ask spread is a common practice. The Bid-Ask spread is the difference between an amount the buyer is willing to pay and the amount a seller is ready to accept. The measurement scale is taken in terms of basis points or bps, where 1 bps=0.01%.
Coinmetrics recent report conducted a study to analyze the Bid-Ask spread in the current market.
Bid-Ask spread indicated absence of Liquidity
According to common consensus, a B/O spread should usually be under 20 bps under normal trading parameters. On observing the chart below, a normal spread in the market can be understood.
However, large price movements usually create a ripple effect in the Bid-Ask spread, as the market instantly reacts to market volatility.
During September 2019, Bitcoin‘s price dropped from $9500 to $800 within a 24-hour window and the Bid-Ask spread jumped drastically for a brief period in the charts.
As observed in the chart above, the B/O spread spike above 50 bps but as the price attained stability, the spread was under 20 bps levels again in the network.
In light of the above scenario, the situation was significantly different at the present time.
The slump on 12th-13th March inevitably affected Bid-Ask spread as usual but since then, the spread levels have failed to return to normalcy.
B/O spread data continued to indicate levels above 20 bps until 23rd March, which is exactly 10 days after the crash. Such volatility in the B/O spread implied the market continued to lose its liquidity.
The community speculated that another reason for the reduction of liquidity is the fact that users expected the turbulence to continue, and they were waiting to improve their spreads in the market.
Lack of Open-Interest in Derivatives Market
An argument can be made that liquidity in the exchanges was dropping due to the absence of exiting market investors. As mentioned before, a significant part of investors conducted a sell-off on the 12th and since then, traders have idealized a cautious approach.
The Open-Interest on major exchanges hasn’t recovered as well, hence the Bid-Ask spread continues to indicate a loss of liquidity.
