Cryptocurrency Exchanges and Traditional Markets: A Multi-algorithm Liquidity Comparison Using Multi-criteria Decision Analysis

Abstract

This paper investigates whether cryptocurrency exchanges exhibit greater liquidity than traditional financial markets. Utilizing four different liquidity measures, we evaluate the liquidity of six leading cryptocurrency exchanges and nine traditional small-cap stock indices across diverse geographies and rank the markets according to their liquidities. We investigate the Pre-Pandemic, First and Second-wave COVID-19, and post-pandemic economic periods. Multi-Criteria Decision Analysis, employing Borda and Keener Ranking techniques, is used to validate the robustness of our liquidity rankings. Our findings reveal that the Russel 2000 Small Cap is the most liquid among traditional markets, while Binance is the most liquid cryptocurrency exchange. Results show that Small-cap indices are generally more liquid than cryptocurrency exchanges. However, during the second wave of the COVID-19 pandemic, individual and institutional investors used cryptocurrencies as a safe haven, with Binance exhibiting better liquidity than traditional markets such as Nifty SC 100. In the post-pandemic period, cryptocurrency market liquidity significantly deteriorated compared to pre-pandemic levels. We argue that despite investors using cryptocurrencies as diversification tools during economic stress periods, cryptocurrencies fail to serve as a dependable asset allocation tool compared to small-cap equities. With contributions encompassing a pre and post-pandemic liquidity assessment, the development of a multifaceted liquidity framework utilizing Multi-Criteria Decision Analysis, and liquidity comparisons between traditional and cryptocurrency markets, this study delivers substantive enhancements to the analysis and understanding of global market liquidity for traders and researchers.