Cryptocurrency liquidity during the Russia-Ukraine war: The Case of Bitcoin and Ethereum

We use the event study methodology to examine the response of liquidity of Bitcoin and Ethereumto the Russia-Ukraine war. In addition, the methodology allows us to investigate whether the eventhad a transitory or a permanent effect on cryptocurrency liquidity. We measure liquidity using Corwin-Schultz, and Abdi-Ranaldo spread estimators for hourlytransactions on Bitcoin and Ethereum cryptocurrencies from 1/02/2022 to 31/03/2022. We definetwo sample periods to capture transitory and permanent effects. The transitory effect isinvestigated over a window spanning -20 and +20 days. For a more extended post-event period,we use a linear regression model to analyze the effects of other factors on the liquidity risk ofBitcoin (BTC) and Ethereum (ETH). The findings reveal a significant but temporary impact of the Russia-Ukraine war on the liquidityof Bitcoin and Ethereum. Liquidity levels have increased within the first two days around the eventday and then returned to the pre-event level after that. However, the response of BTC and ETHcryptocurrencies’ liquidities to the Russian invasion of Ukraine is not uniform. This is the first paper that assesses the liquidity level of two major cryptocurrencies (Bitcoin andEthereum) in response to an extreme event: the Russia-Ukraine war. The hypothesis is that tradingin the cryptocurrency market will increase due to market participants’ goal of evading regulatorysanctions. Furthermore, market participants may also take advantage of cryptocurrencies’popularity as safe-haven assets.