The Vanishing Liquidity Threat In The Bitcoin Realm

Mar. 28, 2023
The Vanishing Liquidity Threat In The Bitcoin Realm

Bitcoin has unexpectedly gained momentum during the banking crisis. Still, investors seeking to increase their investments face the challenge of low liquidity, causing a potential for volatile price swings.

Since March 10th, when Silicon Valley Bank’s (SVB) failure sent shockwaves through mainstream markets, the leading cryptocurrency’s price has soared by 40%, reaching around $27,700. However, its liquidity is simultaneously decreasing.

Kaiko, a crypto data provider firm, reveals that bitcoin market depth is at a 10-month low, even lower than after the FTX collapse in November. The market depth for the top trading pairs – bitcoin-dollar and bitcoin-tether – currently stands at 5,600 bitcoin, roughly $155 million.

Kevin de Patoul, CEO of Keyrock, explains the challenging situation,

As a market maker, we try to provide liquidity where we can, but we’re facing a difficult situation— There is a big network effect here. In the short term at least, liquidity will remain a challenge.

Conor Ryder, a research analyst at Kaiko, reveals that Slippage, a liquidity metric that measures price changes between trade placement and execution, has also risen. Ryder notes the slippage for buying bitcoin with USD on Coinbase is 2.5 times higher than at the beginning of March.

The Impact Of Bank Collapses On Crypto Liquidity

The network effect de Patoul mentions stem from the collapses of Silvergate Capital and Signature Bank. Market makers, who enhance liquidity by quickly buying and selling tokens, utilize these banks’ networks to transact with exchanges.

Reduced liquidity normally results in more volatile markets, particularly in the crypto sphere. Kaiko’s Ryder suggests that this may be one reason behind bitcoin’s recent price jump.

CryptoCompare’s Bitcoin Volatility Index experienced a spike last week. The index reached 96, significantly higher than the 52 to 65 range from the previous month. Despite this, the crypto managed to maintain its position amid the broader market disorder.

Joseph Edwards, an investment adviser at Enigma Securities, warns that

liquidity is probably going to get worse and worse—Even if some players haven’t left the place, they are on the sidelines right now because of what’s happening with banking turmoil.

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Additionally, experts say that the recent banking crises and rising interest rates have made many investors trade cautiously, further impacting crypto liquidity.

Kashif is a crypto-journalist with over 4 years of experience in the Cryptoverse. He began his career as a software engineer, but his curiosity towards decentralized technology lured him into the labyrinth of crypto, where he discovered a passion for reporting the latest news and developments in the field.