What Drives the Liquidity of Cryptocurrencies? A Long-Term Analysis

Abstract We analyze the liquidity of four cryptocurrencies on four large trading venues over a four-year period. We estimate the Abdi-Ranaldo spread estimator from hourly transactions data and compare liquidity across cryptocurrencies and exchanges. In order to identify the drivers of cryptocurrency liquidity we analyze a broad set of explanatory variables from general financial markets, global cryptocurrency markets as well as variables specific to each exchange-currency pair. S&P 500 returns, the VIX, volatility of cryptocurrency returns, the dollar trading volume and the number of transactions are the most important determinants of liquidity while general financial market variables have no explanatory power.