Yesterday, shortly before 9:50am CST, the price of Bitcoin dropped $981 (9.7%) in several minutes, before stabilizing down about 6%.
Liquidity refers to the relationship between traded size and price impact. If you can buy or sell a large amount of an asset like bitcoin at the prevailing market price, then the market is characterized as highly liquid. If only small amounts are available to purchase, with larger amounts only available at much higher prices, then the market is characterized as illiquid. A barometer of market liquidity is often the bid-ask spread. Rather than looking only at the top of the book prices, you could, for example, take the spread between the average price one could buy 100 BTC (~$1 million) and the average price at which one could sell. This is what we've done in this study.
In order to get a more accurate view of the market, we've combined order books from five leading exchanges: Coinbase, Kraken, Bitstamp, Gemini, and Bittrex. Real-time and historical order book information can be viewed on CoveTrader: trader.covemarkets.com.
Below are snapshots from the historical order book at each minute marker. Visually, you can see that the difference between the bids and asks is very small before the price drop, then wide and volatile both during and after the price drop.
Below we can see the difference between the bid and ask in percentage terms and should note two forces at work:
1. Increase in bid-ask spread: The average spread before the price drop was 0.02%, while the average price after was 0.56%, a fairly massive increase.
2. Volatility in bid-ask spread: As the price drops and then attempts to stabilize, the prices in exchange order books become erratic and in this case there were inter-exchange arbitrage opportunities. For example, at 9:49, there were several large offers on Coinbase below $9400, while other exchanges were still bid higher. The market quickly snapped back up and stabilized.