Predicting Liquidity In The Cryptocurrency Market: Testing The Invariance Theory On A New Market Structure And Asset Class

Abstract: By integrating dimensional analysis and principles of market microstructure invariance, this study documents a nearly invariant relationship between relative bid-ask spreads and illiquidity for the cryptocurrency market. The relationship is found by studying cryptocurrency trading data in two dimensions; Along a time series dimension, where data is aggregated on a daily level, and along an intraday dimension, where variables are aggregated at five-minute intervals across all trading days. The examined illiquidity measure is composed of directly observable asset characteristics such as price, trading volume, and volatility, and the findings provide support for the use of this universal transaction cost model for bid-ask spreads in the cryptocurrency market. Moreover, the results also demonstrate the presence of market frictions in this supposedly more efficient market structure.