Addressing whether cryptocurrency exchanges suffer from liquidity problems requires splitting them into two simple camps; centralized and decentralized. Typically, centralized exchanges include Binance, Bittrex, GDAX, Bithumb, and Coinbase. Decentralized exchanges include Waves, Stellar, Augur, and 0x (Ethereum protocol layers).
Centralized exchanges, at least on the face of it, are not suffering from liquidity issues. Binance’s user numbers and profits are substantially up, despite the protracted bear market. However, 36% of traders, according to one poll, are dissatisfied with the volume of available liquidity. Moreover, ICEs Bakkt, amongst other institutional cryptocurrency exchanges, are clearly needed in order to provide key corporations substantial access to the digital markets.
Centralized exchanges also suffer from listing ‘too many’ assets. As of today, 387 coins are listed on Binance alone. Volume for the top 10 BTC trading pairs (including BTC/USDT) ranges from $266 million for BTC, to $24 million for XLM. This daily volume quickly drops off, however, with Litecoin (31) $5.2million and IOTA (49) only $2.8 million. Things get even worse below the top 50, with hundreds if not tens of thousands in daily volume only. The result of this low liquidity mainly manifests itself as thin order books and volatile price spikes. Average and professional traders have to be careful with any significant market entries, with large spreads eating up profit margins.
Moving our attention over to Decentralized exchanges and things don’t improve. StellarX, a frontend for Stellar’s inbuilt DEX functionality, currently turns over only a few hundred thousand a day. 0x only does slightly better at $977k a day, with Waves also doing a small $345k. To put these volumes in perspective, the mature forex market trades roughly $5.3 trillion a day. The Nasdaq? $135 billion.
As a result, violent price-swings and paper-thin order books are rife, with a few thousand dollars often sending the price of an underlying asset soaring or diving. Accessibility of fiat or cryptocurrency on-ramps compounds this problem, drying up potential liquidity.
Of course comparing established and mature market liquidity to a growing ecosystem isn’t a fair comparison, however, it does serve to highlight the monstrous gap between current liquidity levels experienced by cryptocurrency pairs and those of traditional assets. Decentralized exchanges, due to the nature of their structure, potentially have a greater challenge ahead than their centralized counterparts. Whereas the Binance’s and GDAX’s can pull funding and liquidity levers, such as Tether, to aid the trading of currency pairs, decentralized exchanges are completely reliant on third-party listings and finance.
StellarX and 0x are looking to mitigate this inherent risk by offering completely free trading. This should entice both professional traders and corporate market makers. StellarX even offers weekly market maker rewards.
It all sounds like doom and gloom. However, these are some positives. Whilst trading volume and liquidity is inherently low, corporate interest has never been higher. Bakkt, ETFs and more are all lining up to provide critical industry access, and hundreds of billions in liquidity, for the cryptocurrency markets. Once they are finally approved by the regulators, the ecosystem can expect a financial catalyst never before witnessed within this market. Until then, serious liquidity and markets will be somewhat on hold.