Dan Cawrey is the CEO of Pactum Capital, a financial services firm focused on managing risk with cryptocurrency derivatives.

The following is an exclusive contribution to CoinDesk’s 2018 Year in Review.



Published writers say it. Powerful businesspeople say it. Elite athletes say it. Investors with a track record of smart decision-making say it; “Consistency is the key to success.”

In cryptocurrency, many investors say bitcoin is a store of value, a digital version of gold. But bitcoin doesn’t behave like gold – offering a stable way to hold value long-term. Bitcoin often seems like a pretty inconsistent and manipulated market. For example, why does bitcoin trade at a penny tick size on most major cryptocurrency exchanges?

‘Tick size’ is a term meant to refer to the minimum quoting and trading amount available on an exchange. When bitcoin was worth a few dollars, a penny tick size made sense. When bitcoin was worth $100, penny ticks were reasonable.

At over $1,000, it creates problems. It disincentivizes standing orders while incentivizing volatility.

Imagine this scenario: Bitcoin is trading at $3,500.03. A human trader puts in a limit order to buy at $3,500.00. An automated trading system then “penny jumps” the human trader by putting in a small buy order at $3,500.01.

The systemized trader’s order will get filled first.

Automated cryptocurrency trading systems take comfort in these scenarios. This is because the orders of human traders need to get filled before they lose money. Therefore, systemized trades will always be one step ahead of any human with such small spreads. This happens constantly on cryptocurrency exchanges.

High-volume bitcoin traders are using systemization algorithms. The average trader is using manual or simple bot orders. These are not as easily adjustable on the fly to the whims of low tick sizes.

One penny orders suddenly appear and disappear on bitcoin exchange order books. This is because there’s very little disincentive to place orders at a 1 cent tick. Source: Coinbase Pro

Bitcoin behaves unlike any other financial asset many have ever traded.

Most people buying financial assets try to get the highest quantity for the lowest price possible. Bitcoin is often the opposite, however. Traders try to buy the least amount possible at a higher price.

This is especially true with one penny ticks because of a combination of small order sizes and tiny spreads.

This Has Been Studied Before

In the foreign exchange market and equities markets, there is some precedent to changing tick sizes.

Forex markets, for example, decided to do an experiment: Lower overall tick size for currencies from what’s called a pip (0.0001) to decimal pip (0.00001).

The result? More high frequency traders with computerized algorithms “jumping” regular traders. This created uneven pricing, as basic bots and human traders simply don’t account for more decimals.

Source: Journal of Banking and Finance, Vol. 85, 2017

The SEC also did a review of this. They performed a tick size pilot involving small cap stocks. Results show increased depth, but decreased price quality. In addition, the depth increase appears to be related to large market orders. Crypto doesn’t entail millions of dollars in trades very often – that is executed in over-the-counter, not the spot market.

Imagine, for instance, that tick sizes for crypto were even lower than a penny. This would mean more opportunity for advanced HFT and less for retail traders. Conversely, having higher tick sizes would mean better trading advantages to average investors.

The larger the tick, the better for trading – which is obtaining highest quantity for the lowest price, as mentioned about. The smaller the tick, the worse pricing average traders/investors get.

A Call to Crypto Exchanges

Exchanges should take heed as changing tick sizes clearly isn’t a crazy idea. In fact, it’s something that should be experimented with given the nature of crypto as a new era in finance. Indeed, having a larger tick size in crypto isn’t unprecedented. CME, for example, lists bitcoin futures with a $5 tick size.

Adding inefficiencies to the market, sounds like existing banking, doesn’t it? Some may argue increased spreads are bad because it creates profit for middlemen who don’t actually do anything.

Actually, spreads in markets do serve a purpose. There is no specific rule on this per se. (Only the wisdom that optimal spreads should be as tight as possible). This means bids and asks should be close together while still attracting enough liquidity on either side of it to transact.

Still, it’s clear that right now, one penny spreads in bitcoin do not attract enough liquidity to transact at the best bid and offer. There’s just a bunch of jumping going on, with orders placed and removed all the time. This is why small tick sizes are really hard to understand from a trading point of view.

Increasing bitcoin’s tick size from one penny to $0.50 or $1 would go a long way in leveling the playing field for human traders. It would also increase the cost for traders currently penny jumping and manipulating the overall price.

Pactum Capital focuses on cryptocurrency trading and market making. Our firm is sometimes several percentage points of daily volume on regulated U.S. exchanges. But, bitcoin’s tick sizes are continually perplexing to us.

So, why does bitcoin still trade with a penny tick size on most major exchanges?

It’s a question we’d like to see answered in 2019.

Have an opinionated take on 2018? CoinDesk is seeking submissions for our 2018 in Review. Email news [at] to learn how to get involved.

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