Crypto exchanges come in all forms and sizes. We have full-pledged order book trading platforms where different buyers and sellers set their prices while the platform aggregates them in the order book.
There are also exchanges that offer a direct exchange of the person’s cash in exchange for crypto or vice versa. Of course peer-to-peer marketplaces that serve as escrow for the buyers and sellers to negotiate remain popular. Finally, there is trading that happens between peers amongst themselves away from marketplaces and exchanges.
What is a Market Spread?
Table of Contents.
- 1 What is a Market Spread?
- 2 Comparison of Spreads Between Local Exchanges
- 3 Findings
One of the most basic concepts that every crypto trader should know is the spread or the difference between the lowest sell order and highest buy order in a crypto exchange. Basically it’s the gap between the highest price a person is willing to buy and the lowest price another person is willing to sell.
The spread allows one to gauge the liquidity in an exchange but it also has other functions. For many direct exchanges (wherein the person has to agree on the price set by the exchange, which in this case acts like a broker), it’s possible that the spread between the bid and ask is their way to make money, especially if they advertise themselves as “commission free.” These exchanges are the ones providing liquidity to the market participants.
In cryptocurrency exchanges, the orders are placed in the order book by the market participants themselves, which we will call traders. In theory the exchange is being monetized through trading fees and the market spread exists because of the traders themselves.
Exchanges with higher liquidity typically have very low spreads due to the abundance of market participants: There are thousands of buyers and sellers competing to get their orders fulfilled.
Comparison of Spreads Between Local Exchanges
The increasing local interest in cryptocurrencies gave rise to a lot of questions on where to buy Bitcoin in the Philippines locally. There are many things to consider when and “where to buy,” such as the cash in and cash out options, the difference between global market rates, time preferences, among others. If the trader is looking at the spreads between exchanges as an important factor, then here’s what we found:
1. Direct Exchanges almost always have the same spread rate.
For exchanges where they set the price to the participants, their spreads are at a steady rate throughout the day and across different days. Mobile wallets where users can buy and sell are typically making money from the spreads themselves and the exchanges themselves provide the liquidity. The special exception is BloomX, whose beta app gets their liquidity from Binance. (The app is still in beta and there is a waiting list for users.)
Most of the time, these exchanges are the starting point for everyone beginning their crypto journey. The user creates an account, funds their account then buys Bitcoin. That’s it. Direct exchanges almost always have the largest number of cash in and cash out options available, really the perfect choice for beginners.
2. Spreads in local exchanges are near 1% most of the time.
If this research was done in the previous years, it’s possible the spread is higher. (Although we don’t want to assume since we did not do the research then. The assumption is because there are more market participants today than in the previous years.) We think this is a sign that liquidity is getting better, in the sense that it’s possible for the trader to take advantage of the spread in different local exchanges i.e. buy from one local exchange then sell it at another one with more favorable prices to the seller. (This is called arbitrage.)
Of course, the elephant in the room is the existence and availability of international exchanges, with hundreds of coins available on those platforms. For the trader who wants to stay in local exchanges (preferable come accounting time,) at least the local ones are getting there, though not quite. If the trader is not a beginner (which means they are already aware of the spreads and the higher fees of direct exchanges,) then the local order book platforms are the next smart move.
3. In P2P marketplaces, traders know arbitrage and opportunities in other coins,
The trader in the P2P marketplace is already aware of the opportunities in crypto like arbitrage. Buy Bitcoin locally then sell it to a buyer elsewhere in the world. Arbitrage exists in P2P and in one interview, it was revealed that Filipinos are aggressively taking advantage of it.
The trader in the P2P marketplace also knows that there is opportunity in coins not named “Bitcoin.” There are hundreds of coins. Regardless of utility or whatnot, the trader knows there’s an opportunity to make money there. Hence, why buy Bitcoin in P2P when USDT can be bought? USDT allows the trader to park their money in a crypto exchange and wait for the time to buy.
Note on the Findings
The research only included exchanges with fiat onramp offramps locally, hence we see Binance P2P and not Binance. For record’s sake, this is the spread on June 23, 2021 12:52 pm at an international exchange:
Spread Rate: 0.0000294342082956998%
Next, the difference in spreads should not be misconstrued as: one exchange is better than the other. The direct exchanges might have a higher spread but they have the most number of cash in and cash out options. The orderbook exchanges may not have the higher number of onramp and offramps, but they have better spreads. (Note that PDAX has a Pro and Basic mode, which allows it to function both as a direct exchange and an order book platform.) The crypto trader should first examine what kind of trader they are and that’s the time they can choose which exchange they prefer.
Check the spreadsheet here for June.
This article is published on BitPinas.com: Crypto Exchange Market Spreads 101 | What is a Market Spread?