Understanding Bitcoin Liquidity

Abstract This paper analyzes the evolution of Bitcoin liquidity and its determinants. Using a new methodology to identify the most liquid exchange at each point in time, I find that driving factors behind the overall increases in liquidity and trading activity come mostly from within the Bitcoin network. While the state of the US economy only weakly influences Bitcoin liquidity, there is some evidence that gold and Bitcoin are perceived as complements. Moreover, patterns in market making and trading are consistent with the activity of both institutional and retail traders.