Liquidity uncertainty and Bitcoin's market microstructure

This paper provides a novel measure of liquidity uncertainty for Bitcoin using bid-ask spread data from Bitfinex − one of the largest and most liquid Bitcoin exchanges. This measure can be used to analyze liquidity developments in Bitcoin exchanges or to gauge the immediacy associated with buying or selling Bitcoin. It then proceeds to identify what aspects of Bitcoin's market microstructure can explain the time series behavior of this liquidity uncertainty. The estimation results are based on a Markov regime-switching model that captures episodes of high and low liquidity uncertainty for Bitcoin over the period from October 2013 to March 2018.