Bid-ask Spread: The Factors Influencing Bid-ask Spread In The Cryptocurrency Market

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Introduction

Good evening everyone, Today I wish to talk about a very interesting topic with you.

This topic I wan to discuss with you is a crucial one and Initially, I do not understand it's concepts, not until I made extensive research about it.

This topic we are going to discuss about today is bid-ask spread, a few of us are familiar with this topic while the others know this topic so well.

Nonetheless, I am going to share my knowledge on this topic.

What Is Bid-ask Spread

Bid-ask spread which is an important concept in the financial market is known to be the representation of the difference between the highest price that a buyer is able and willing to pay (bid price) for a commodity, and the lowest price (ask price) that a seller is willing to sell a commodity.

This spread helps to function as the measure of market efficiency, liquidity, and transaction cost.

The bid-ask spread at his core reflects the demand and supply dynamics.

The ask-price is known to be the minimum price that a seller is willing accept and the bid-price is known to be the maximum price that a buyer is willing to give for a particular commodity.

And a spread is often being created by this price difference and it is a very important factor to be considered when determining the cost of executing a trade.

Liquidity is known to be a concept that is greatly associated with bid-ask spread.

In a market with high liquidity, there tends to be numerous buyers and sellers, and as such the bid-ask spread appears to be narrow.

The bid-ask spread appears to be narrow because there is a high chance of finding a match between the seller's ask and the buyers bid.

Let's consider some concept of bid-ask spread.

Factors Influencing Bid-ask Spread

The bid-ask spread just like every other financial market in the cryptomarket is being influenced by a variety of factors, and this factors reflects the market condition, the dynamic of supply and demand of the specific asset being traded.

• Market Liquidity:

One primary determinant of bid-ask spread in the cryptomarket is what we know to be market liquidity.

Liquidity here is understood to be the ease to which market is bought or sold without significantly affecting the price of such assets.

Cryptocurrency which posseses a higher trading volume often have a very low bid-ask spread, and this is because there are numerous active buyers and sellers in the market.

The popular cryptocurrencies such as Bitcoin and ethereum tend to have a tighter bid-ask spread in comparison to other altcoins because they possess a larger market capitalization.

• Volatility:

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One identifying mark of cryptocurrency is their price volatility, and this feature significantly influences bid-ask spread.

During periods with higher volatility, moments after a major announcement or an important market events, the bid-ask spread tends to increase as Investors and traders become more risk-averse.

The increased potential and uncertainty for rapid price movements result in a higher demand for a premium as a compensation for the higher risk.

• Exchange Dynamics:

Across various cryptocurrency exchanges, the bid-ask spread varies.

Exchange dynamics play a very important part alongside factors such as the quality of the trading platform, number of active users and the reputation of the exchange affecting liquidity.

More participants are often drawn to a well reputable and established exchanges, thus contributing to a tighter spread.

Smaller exchanges on the other hand may experience a wider spread, due to a low market liquidity.

• Market Maturity:

Another Important factor influencing bid-ask spread is the maturity of the cryptocurrency market.

In the early days of the existence of a cryptocurrency, when it's market is new and less mature, there is usually a wider bid-ask spread, and this is as a result of lesser participants in the market.

As the market grows and gain popularity and acceptance, there tend to be an increase in it's liquidity, and this is as a result of more market participants, and this results to a tighter bid-ask spread.

• Regulatory Environment:

The regulatory environment has a huge impact on bid-ask spread in the cryptospace.

Changes or uncertainties in regulations can result to an increased risk perception amongst market participants which will lead to a wider bid-ask spread.

Market confidence is often boosted and strengthened by a clear and supportive regulatory framework, which inturn reduces bid-ask spread by attracting more market participants.

• Market Sentiment:

Market sentiment os another crucial factor that affects bid-ask spread in the market.

Market sentiment has great influence on the cryptomarket.

Positive sentiment which are caused by institutional adoption, positive news or technological development can result to an increased demand and a narrower spread.

And also, negative sentiment which are driven by regulatory crackdown, security breaches and other negative news can result to a wider bid-ask spread, as traders become more averse to risk.

Conclusion

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In cryptocurrency market, bid-ask spread is being influenced by an interplay of factors which includes volatility, market liquidity, market maturity and transaction cost.

These information are needed by traders and investors as it will help them to manage risk and make informed decisions.