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ETF Approvals Tighten Crypto Exchange Spreads, Boosting Market Efficiency

The recent nod of approval for spot exchange-traded funds (ETFs) in the U.S. has instigated a notable shrinkage in the bid-ask spreads across major cryptocurrency exchanges, signaling a leap towards greater market liquidity and more profound trading volumes.

Market Liquidity on the Rise

Following the green light for spot ETFs, leading U.S. exchanges such as Coinbase and Kraken have exhibited a tightening in bid-ask spreads, a phenomenon reflective of a more liquid market. Analysts from Kaiko have shed light on this development, emphasizing the significant reduction in bid-ask spreads for Bitcoin (BTC), which mirrors the gap between the highest bid and the lowest ask prices.

January’s Volatility Spotlight

Kaiko’s recent research underscores the volatility experienced by exchange Kraken, with a notable peak in spreads hitting 10 basis points on January 20th. Concurrently, Bitstamp and Coinbase also saw their spreads hit a zenith between January 8th and 13th, recording 6.7 and 1.7 basis points respectively. These numbers took a dive in the successive weeks, with spreads contracting to below 1 basis point.

A Beyond-Border Trend

The trend of narrowing spreads isn’t confined to the U.S. or to Bitcoin alone. Kaiko’s analysis points out that the average bid-ask spread for the most liquid Bitcoin and Ethereum (ETH) pairs has diminished across an array of cryptocurrency exchanges globally.

Exchange Competition Heats Up

With the approval of spot ETFs, exchanges are bracing for a surge in competition. Coinbase is already setting the stage with fee waivers for substantial traders, an aggressive move that is anticipated to press spreads even lower. “Coinbase and Kraken saw the strongest decline while the drop was less pronounced on Binance and OKX, which already offer very low spreads,” Kaiko reported.

Regulatory Stance Remains Cautious

Despite the SEC’s approval of spot Bitcoin ETF applications, Chairman Gary Gensler maintains a cautious approach towards cryptocurrencies. In a statement, he clarified that the SEC’s approval does not equate to an endorsement of Bitcoin, preserving a critical outlook on the burgeoning asset class.