Examining Liquidity of Exchanges and Assets and the Impact of External Events in Centralized Crypto Markets: A 2022 Study

Most cryptocurrencies are bought and sold on centralized exchanges that manage supply and demand via an order book. Besides trading fees, the high liquidity of a market is the most relevant reason for choosing one exchange over the other. However, as the different liquidity measures rely on the order book, external events that cause people to sell or buy a cryptocurrency can significantly impact a market's liquidity. To investigate the effect of external events on liquidity, we measure various liquidity measures for nine different order books comprising three currency pairs across three exchanges covering the entire year 2022. The resulting multivariate time series is then analyzed using different correlations. From the results, we can infer that as a cryptocurrency's market capitalization and the exchange's trading volume increases, so does its liquidity. At the same time, only a moderate correlation of liquidity between exchanges can be observed. Furthermore, our statistical observations show that external events, particularly the events around FTX and the Terra Luna crash, caused significant changes in liquidity. However, depending on the exchange's size and the cryptocurrency's market cap, the liquidity took a shorter or longer time to recover.