As a cornerstone of the cryptocurrency space, exchanges serve as primary liquidity channels for buying and selling digital assets. This study examines how exchange liquidity impacts portfolio performance using a basic rebalancing strategy, comparing Binance and Bittrex—two prominent U.S. crypto exchanges.
Study Design & Parameters
Data Collection
- Source: Provided by CoinAPI via REST APIs.
- Scope: Compiled the top 20 bid/ask prices on Bittrex at each rebalance interval (December 20, 2017 – October 30, 2018).
- Tool: Used by platforms like Shrimpy for backtesting and market analysis.
Trading Fees
- Applied a flat 0.1% fee for both Binance and Bittrex to isolate liquidity effects.
- Example: LTC → XRP incurred two 0.1% fees (LTC → BTC → XRP).
Key Variables
- Rebalance Periods: 1 hour, 1 day, 1 week, 1 month.
- Exchanges: Binance vs. Bittrex.
Portfolio Configuration
- Initial Value: $5,000.
- Assets: 10 randomly selected from 35 options (e.g., BTC, ETH, XRP).
- Allocation: $500 per asset.
Backtesting
- Process: Simulated 1,000 backtests per rebalance period.
- Outcome: Compared median rebalance performance against buy-and-hold.
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Results
| Rebalance Period | Binance Median Gain | Bittrex Median Gain |
|------------------|---------------------|---------------------|
| 1 Hour | +26.37% | Baseline |
| 1 Day | +18.92% | +12.45% |
| 1 Week | +9.84% | +6.33% |
| 1 Month | +3.21% | +1.89% |
Hourly rebalancing on Binance outperformed Bittrex by 26.37%, highlighting liquidity’s critical role in tight bid/ask spreads.
Conclusions
- Liquidity Matters: Higher liquidity reduces price slippage and narrows spreads.
- Strategy Impact: Even minor variables (e.g., exchange choice) significantly affect automated portfolios.
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FAQs
Q1: Why focus on liquidity?
A1: Liquidity ensures smoother trades with minimal price impact, crucial for frequent rebalancing.
Q2: How were assets selected?
A2: Randomly from 35 assets available on both exchanges during the study period.
Q3: Why standardize trading fees?
A3: To isolate liquidity effects, eliminating fee structure as a variable.
Q4: Can these results be replicated today?
A4: While market conditions change, liquidity remains a persistent performance factor.