Exchange Liquidity - A Comparative Study

paul-calescu-1022076-unsplash.jpg

As a cornerstone of the cryptocurrency space, exchanges serve as a primary liquidity channel on which digital assets can be bought and sold. In this study, we’ll take a look at the effect that exchange liquidity can have on a portfolio with a basic rebalancing strategy in place. We will be comparing the liquidity markets for both Binance and Bittrex, two of the more prominent exchanges within the U.S crypto market.

Study Design/Parameters

DATA

The data for this study was provided by CoinAPI. Using their rest APIs, we were able to compile the 20 best bid and ask prices available on Bittrex at each rebalance interval. Our data set ranges from December 20th 2017 until October 30th 2018.

CoinAPI is a service which collects data from countless exchanges. Applications such as Shrimpy can then use that data to construct accurate backtests, market analysis, and produce comprehensive research.

TRADing fees

Trades included the standard .1% fee for Binance. A trade from LTC to XRP would therefore first trade from LTC to BTC (which would incur a .1% trading fee) and then from BTC to XRP (which would incur another .1% trading fee). The result is a fee model that is as accurate as possible.

In this study, we will compare Binance and Bittrex exchange liquidity. Although they both utilize different trading fees, we will use the same trading fee of .1% for backtesting both Binance and Bittrex rebalances. Since the purpose of the study is to evaluate the liquidity on the exchanges and not their respective fee structures, the fees should remain constant to ensure we are comparing as few variables as possible.

Learn more about the affect of trading fees on rebalance performance.

Variables

  • Rebalance period - The first variable for this study is the rebalance period. A rebalance period is the specific amount of time between each rebalance. So, a period of 1 day would result in a rebalance every single day at the exact same time. In this study, the rebalance periods that will be tested are 1 hour, 1 day, 1 week, and 1 month.

  • Exchange - The second variable for this study is the exchange. We will examine the performance of rebalancing on two different exchanges. These two exchanges are Binance and Bittrex. They were chosen due to their popularity over the last year.

Learn more about rebalancing for cryptocurrency.

PORTFOLIO SIZE

Each portfolio was created with an initial portfolio value of $5,000. The portfolio size for this study has been fixed at 10 assets per portfolio. Given a portfolio of 10 assets, the initial balance for each asset is therefore allocated such that every asset has $500 worth of that asset.

Learn more about how the number of assets in a portfolio affects performance.

ASSET SELECTION

Constructing each portfolio was done at random. All assets which were available between December 20th 2017 and October 30th 2018 on both Bittrex and Binance were included during the selection process. This amounts to a total of 35 different assets. The list of assets includes: ADA, ADX, ARK, BAT, BNT, BTC, DASH, DNT, ENG, ETC, ETH, KMD, LSK, LTC, MANA, MCO, METAL, NEO, OMG, POWR, QTUM, RCN, SALT, SNT, STORJ, STRAT, USDT, VIB, WAVES, XLM, XMR, XRP, XVG, XZC, ZEC.

Learn more about how to build a strong portfolio.

BACKTEST

A backtest is the process of using the trade data from the exchange to simulate how a strategy would have performed over a given time period. This is often used to test the viability of a strategy by running it through large data sets. In this study, we used backtests to compare the results of rebalancing to those of buy-and-hold. The number of backtests we ran for each portfolio size and rebalance period pair was set to 1,000.

Read more about backtests or run your own.


Results

The results for each backtest were determined by taking the portfolio value of Binance and comparing it to the portfolio value of Bittrex. This was done by using the equation: (RfBinance - RfBittrex) / RfBittrex, where RfBinance is the final rebalancing value for Binance and RfBittrex is the final rebalancing value for Bittrex.

1 month rebalance period

BinanceVSBittrex1month.png
Screen Shot 2018-12-12 at 12.22.53 PM.png

The table above illustrates the median performance of 1,000 backtests which were run on both Bittrex and Binance. The median buy-and-hold value is the value of the median portfolio which performed no trades by the end of the backtest period. The median rebalance value is the value of the portfolio which resulted from the rebalance period that is depicted in the top left corner of the table. Each backtest is allocated $5,000 at the start.

Performing a monthly rebalance on Binance instead of Bittrex demonstrated a median performance improvement of 1.58%.


1 week rebalance period

BinanceVSBittrex1week.png
Screen Shot 2018-12-12 at 11.55.01 AM.png

This table illustrates the median performance of 1,000 backtests which were run on both Bittrex and Binance. The median buy-and-hold value is the value of the median portfolio which performed no trades by the end of the backtest period. The median rebalance value is the value of the portfolio which resulted from the rebalance period that is depicted in the top left corner of the table. Each backtest is allocated $5,000 at the start.

Performing a weekly rebalance on Binance instead of Bittrex demonstrated a median performance improvement of 2.26%.


1 day rebalance period

BinanceVSBittrex1day.png
Screen Shot 2018-12-12 at 11.54.39 AM.png

This table illustrates the median performance of 1,000 backtests which were run on both Bittrex and Binance. The median buy-and-hold value is the value of the median portfolio which performed no trades by the end of the backtest period. The median rebalance value is the value of the portfolio which resulted from the rebalance period that is depicted in the top left corner of the table. Each backtest is allocated $5,000 at the start.

Performing a daily rebalance on Binance instead of Bittrex demonstrated a median performance improvement of 3.53%.


1 hour rebalance period

BinanceVSBittrex1hour.png
Screen Shot 2018-12-12 at 11.54.28 AM.png

This table illustrates the median performance of 1,000 backtests which were run on both Bittrex and Binance. The median buy-and-hold value is the value of the median portfolio which performed no trades by the end of the backtest period. The median rebalance value is the value of the portfolio which resulted from the rebalance period that is depicted in the top left corner of the table. Each backtest is allocated $5,000 at the start.

1 hour rebalances was the most frequent period that was examined for this study. With a median performance increase of 26.37%, it becomes clear that this high frequency rebalancing experienced the most benefit from being on Binance over Bittrex.


Conclusions

Liquidity is a vital aspect to consider when implementing a rebalancing strategy. Exchanges with higher liquidity result in a more robust marketplace where assets can be bought and sold without having drastic affects on price. When an exchange has higher liquidity, the resulting bid / ask spread is generally smaller and the markets experience a smaller impact for larger trades.

The impact of liquidity is clearly displayed when applying an hourly rebalancing scenario. Despite the only variable being the different bid / ask spreads on each exchange, our Binance rebalancing portfolio had a 26.37% improvement over our Bittrex rebalancing portfolio. With these results, we observe the importance of taking into account ALL factors that may have an impact on portfolio performance, regardless of how small or insignificant it seems. When it comes to automating a portfolio strategy, every single variable can have a noticeable impact on your performance.

Additional Reading

Rebalance vs HODL: A Technical Analysis

Crypto Portfolio Rebalancing: A Trading Fee Analysis

Crypto Users who Diversify Perform Better

•••

JOIN US

You can join our free platform to construct your own long-term strategy that takes advantage of a growing market. Select assets, manage your portfolio over time, and rebalance on a regular interval. Your future in crypto starts with Shrimpy.

Don’t forget to check out the Shrimpy website, follow us on Twitter and Facebook for updates, and ask any questions to our amazing, active communities on Telegram & Discord.

The Shrimpy Team