Getting in and out of a large bitcoin trade on cryptocurrency exchanges like Binance or BitMEX isn’t costing as much as it used to. That might be a healthy sign that digital-asset markets are maturing. 

At Binance, the world’s biggest cryptocurrency exchange by trading volume, the daily average spread between buy and sell orders on bitcoin futures for $10 million quote size declined to a record low of 0.25% on Monday, according to data provided by research firm Skew. The spread, which typically narrows as an exchange’s order book depth increases, spiked to 7.95% during the March crash but dropped shortly after. It has been in a declining trend ever since. 

The so-called bid/offer spread is the difference between the best available price to sell or buy something in a market. It essentially represents liquidity – the degree to which an asset can be quickly bought or sold on a marketplace at stable prices. 

A narrower spread implies a deeper market where there is sufficient volume of open orders  so buyers and sellers can execute a trade without causing a big change in the price. That’s in contrast to a weak liquidity environment, where large orders tend to move the price, increasing the cost of executing trades, and deterring traders – especially institutions – and, in turn, causing a further decline in liquidity. 

Binance and BitMEX offering record low spread on a $10 million quote is a healthy market development, according to Denis Vinokourov, head of research at London-based crypto prime broker Bequant. 

“The tighter the spread, the deeper the order book, the more the market is able to withstand shocks [price volatility],” Vinokourov told CoinDesk in a Telegram chat. 

BitMEX and Binance aren’t alone as other exchanges have also witnessed a steady drop in spreads over the past five months. 

Spreads on Deribit and FTX have also declined from March highs, but still remain considerably higher than those on BitMEX and Binance. 

Bitcoin’s price rally may be one possible explanation for the exchange-wide decline in spreads. 

“Higher liquidity is largely a function of prices being higher,” said Richard Rosenblum, co-founder at GSR, a digital assets trading firm. “At the $12,000 price range, if you have the same amount of tokens on the bid/offer that's three times as many dollars as $4,000 BTC, resulting in much tighter spreads.” 

The bid/offer spread on perpetuals (futures without expiry) listed on BitMEX fell to a lifetime low of 0.17% on July 18 and was last seen at 0.25%.

Binance consistently offered a higher spread than BitMEX before the March crash. Since then, however, the spreads have converged and pretty much moved in tandem. 

“Bitmex's lead has reduced over other exchanges, largely due to reputational risk, following a raft of outages and tech issues earlier in the year,” said Vinokourov. 

Seychelles-based BitMEX suffered an aggressive DDoS attack on March 13, which delayed and prevented requests to the platform. The outage was widely blamed for bolstering price volatility. It suffered another outage in May, but that did not create panic in the market. 

An important driver of order book depth or liquidity is the rate of change in prices. In times of extreme price volatility, spreads tend to widen and exchanges’ ability to execute large orders is reduced. 

For instance, the spread for a $10 million quote on BitMEX, one of the largest derivatives exchanges by open interest, rose to 4.07% from 1.3% on March 13 – the day when bitcoin’s price crashed by 40%. Similar spikes were observed on other exchanges in mid-March. 

Exchanges that are perceived to lack order book depth are often worst hit during times of panic. That’s because both buyers and sellers fear that their trade will distort prices on an illiquid exchange. 

Sellers, therefore, leave offers at a discount to the fair price and buyers leave orders at a premium. That leads to further widening of the bid/offer spread and exaggerated price moves. In other words, weak liquidity begets illiquidity. 

Thus, the record low bid/offer spreads on Binance and BitMEX are a welcome development; the exchanges have a greater ability to face volatility shocks than they did before the March crash.