Understanding liquidity commonality in the cryptocurrency market

Absztrakt (kivonat)

Cryptocurrencies have significantly increased in popularity and received substantial attention in recent years. My paper tests the existence and examines the drivers of liquidity commonality in the cryptocurrency market. The sample includes the top 100 cryptocurrencies by market capitalization and covers the extensive time period between January 1, 2015, and February 28, 2023. Liquidity commonality was calculated using the “market model” of Chordia et al. (2000). According to my analysis, a relatively high level of liquidity commonality can be observed in the examined period. Moreover, the level of commonality varies significantly between groups of cryptocurrencies. The liquidity of coins is more sensitive to the daily changes in market-wide liquidity than that of tokens. If we group cryptocurrencies by their technologies, we also find a significant difference between the groups: the liquidity of smart contracts shows the strongest commonality with market liquidity, while the liquidity of conventional cryptocurrencies shows the weakest. I found that COVID-19 significantly affected liquidity commonality: the relationship between individual cryptocurrency liquidity and aggregate market-level liquidity became significantly stronger after the coronavirus outbreak. My results also indicate that liquidity commonality in the cryptocurrency market varies over time. The commonality was the highest during major crisis events, such as COVID-19 and the start of the war in Ukraine. I also showed that there is a strong relationship between funding liquidity and market liquidity in the cryptocurrency market. To examine the robustness of these results, four different low-frequency liquidity measures were used to calculate individual cryptocurrency and market-wide liquidity.