In the past decade, the cryptocurrency industry has come a long way as an asset class. Bitcoin and Ethereum are no longer frowned upon, although the crypto market is relatively new. Hence, it is imperative to assess the evolving maturity of the asset class.
Although there are several ways to approach such a valuation, the latest report from CoinMetrics examined the order book depth of Bitcoin and Ethereum to assess the state of the crypto market structure.
What is Bitcoin Order Book and Depth?
For any cryptocurrency or traditional exchange, the order book is basically a ledger in which all buy and sell orders are registered, recorded and executed. The order book depth indicates the number of price levels available for the asset at any given time during a trading session.
Hence, a deeper order book depth suggests that there are ample price levels for investors to close their bid or ask prices. And a greater depth of market also means greater liquidity.
Initially, market slippage was a commonality between large buy and sell orders, as slippage would cause investors to lose capital. Slippage occurs when desired orders do not have the correct price range in the order book. However, over time, the market depth of BTC and ETH has improved immensely.
Coinbase, Kraken and Gemini order book depths
Source: Coinmetrics
As can be seen from the attached graphic, the average daily market depth and the gap between the best bid / ask price or BTC-USD has decreased dramatically in recent years. In the past few months, the top 100 bids and requests on the Coinbase exchange were met within 0.2% of the best bid / ask price.
Similarly, Kraken’s $ 6 million order book depth is below 0.5% of best price, which is a commendable average.
For Ethereum, all three exchanges recorded a similarly improved market depth. It was also surprising as ETH also has high trading volumes on DEXs like Uniswap. The fact that this market depth is maintained despite the decline in liquid Ethereum (due to ETH 2.0 staking) is a massive positive.
How does the order book depth help in the long term?
It goes without saying that better market depth directly indicates higher market liquidity for Bitcoin and Ethereum. In a broader sense, this adds to more credibility in the larger financial ecosystem. An improved order book would only lead to greater expansion and adaptability of the asset class as institutions are ready to invest in these digital assets.
Improving depth of market also makes manipulation tactics more difficult. This is because it improves pricing and reduces the chances of high-intensity arbitrage trading between exchanges.
Overall, the market position of Bitcoin and Ethereum only improves with a better order book depth. This is an ongoing process going forward.
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