The banking boom has brought out the surprise winner, bullish bitcoin. Investors looking to increase their stakes face a grave obstacle: A lack of liquidity could lead to wild price swings.
Since March 10, when Silicon Valley Bank (SVB), failed, the price of No.1 cryptocurrency has increased 40% to $27,700.
However, liquidity is dwindling on the other side.
According to Kaiko data provider, Bitcoin’s market depth shows that the asset has reached its lowest liquidity level in 10 months. This is even worse than the November FTX collapse. Kaiko stated that the market depth of the two most popular trading pairs, bitcoin-dollar or bitcoin-tether, is 5,600 bitcoin. This amount is approximately $155 million.
Keyrock CEO Kevin de Patoul stated that while we strive to provide liquidity wherever we can, we are facing a difficult situation. “There is a huge network effect.” Liquidity will be a problem in the short-term at most.
Slippage, which is a liquidity measure that measures how prices change between placing and execution of trades, has also increased. Conor Ryder from Kaiko, a research analyst, stated that slippage for purchasing bitcoin using U.S. Dollars on Coinbase is 2.5 times greater than at the beginning of March.
Kaiko stated that slippage in a simulated $100,000 sale order has increased by two-fold over the past month. This means that the average bitcoin price is now lower than it was a month ago.
The network effect that Patoul was referring to was the collaps Silvergate Capital and Signature Bank. These networks were long used by market makers, who increase liquidity by buying and selling tokens quickly and transact with exchanges.
Low liquidity is often a sign of more volatile markets, particularly in crypto. Kaiko Ryder suggested that this could be one reason bitcoin took off this month.
The CryptoCompare Bitcoin Volatility Index jumped to 96 last Wednesday. This is a far greater number than the 52 to 65 range it saw last month, as the cryptocurrency held its ground despite market turmoil. The index currently hovers around 68.
THE ALAMEDA FACTOR
Binance, the world’s largest crypto exchange, ended zero-fee trades for almost all of its bitcoin trading pairs last Wednesday, further crimping liquidity. This has made it possible for market makers to charge higher fees for execution trades on the platform.
According to Kaiko data, liquidity for the bitcoin-tether pairing on Binance has fallen 70% and trading volumes have fallen 90% since the announcement.
The collapse of Sam Bankman Fried’s FTX and Alameda Research, the hedge funds that Alameda Research managed, is responsible for the disappearing liquidity. Alameda was a major liquidity provider in the crypto sector. Its bankruptcy created a vacuum that has been further exacerbated by the financial crisis of 2023.
Market participants anticipate that new competitors will gradually emerge to fulfill the network functions of Silvergate or Signature. However, they believe complete replacements are unlikely to appear overnight.
Joseph Edwards, an investment advisor at Enigma Securities, stated that liquidity will only get worse until then.
Experts say that it is not only market turmoil that is reducing crypto liquidity. Despite bitcoin’s recent rally after a long downturn, many investors still trade cautiously due to rising interest rates and the banking crisis.
Edwards stated that even though some players are still at the club, they are now on the sidelines because of the banking crisis.
