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  • Stacking up Liquidity: Is Bitcoin Playing in the Major League?

Stacking up Liquidity: Is Bitcoin Playing in the Major League?

Bitcoin is enjoying a comeback, having topped $10,000 for several days in a row according to the crypto price tracker CryptoMarketCap. This got us thinking about its viability as a useful way to store and exchange value, and many investors would argue liquidity is the most important factor to consider.

  • Bitcoin’s average daily liquidity surged from 2018 to 2019, rising from $6.05B to $16.73B.
  • Despite its volatility, bitcoin now sees almost as much daily liquidity as German bonds ($16.73B vs. $19B).
  • U.S. treasuries are by far the most liquid class of assets, averaging some $485B per day in 2018.
  • Gold remains a highly liquid asset even in the age of fiat and cryptocurrencies, topping $112.5B in 2018.

Liquidity measures how often things are exchanged for money. Some assets are highly liquid, like stocks and bonds, because there is a market readily available. Other assets are illiquid, meaning they are more difficult to sell, like physical property or works of art. Illiquid assets may still be very valuable, it’s just harder to exchange them for money.

All of which is to say that liquidity is an important way to think about the maturity of bitcoin. After all, bitcoin owners believe they control an asset that can be exchanged for goods and services, or at least other fiat currencies. The more difficult it is to purchase and sell bitcoin, the less liquid (and less useful) it becomes. Indeed, bitcoin has seen its liquidity explode over the last year, jumping from $6.05B to $16.73B on average each day. Keep in mind, this growth occurred within the context of a historic collapse in crypto values at the start of 2018. This suggests a growing acceptance of bitcoin as a legitimate way to store value.

Our visual helps put these figures in perspective. Bitcoin has enjoyed substantial liquidity growth, but it’s still quite small compared to other major asset classes. German bonds go for slightly more than bitcoin each day, topping $19B on average. Compare that gold, which saw on average $112.5B in average daily liquidity last year. That’s a lot of value changing hands, and in fact some countries dominate the gold market more than others. Or consider the entire S&P 500, which generates $124.7B in daily liquidity. U.S. treasuries remain by far the most widely exchanged asset class, with $485B changing hands each day. With the U.S. deficit topping $1T in 2020, we’re betting treasuries will continue to top the charts in the future.

What do you attribute to the sudden rise in bitcoin’s liquidity? Do you think bitcoin’s recent price changes will increase liquidity? Let us know in the comments.

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