Dry As the Desert? On the Liquidity of a Bitcoin Exchange

We analyze liquidity provision on Kraken, one of the major cryptocurrency exchanges, and compare the results to the foreign exchange (FX) and the stock market, recognizing that Bitcoin has originally been designed as a digital currency and evolved to an investment. In a first step, we characterize liquidity based on traditional models for market microstructure to capture different aspects of the spread. These measures unanimously indicate that the Bitcoin market on Kraken is extremely illiquid compared to the FX markets and usually less liquid than the stocks in our stock market sample. In a second step, we identify liquidity determinants and show that both market specific characteristics (e.g., noise, volatility) and blockchain characteristics play a role in explaining on-exchange liquidity