Bitcoin Faces Liquidity Crisis Despite Price Rise – What’s Next? – Cryptopolite
The shutdown of Silvergate’s SEN and Signature’s Signet networks in early March has created a liquidity crisis for the crypto market. While Bitcoin’s price has recovered from March lows, reaching nearly $28,900, the initial decline remains a concern for the market.
Poor liquidity around an asset leads to market inefficiency, causes severe volatility and deters sophisticated investors from trading.
Liquidity crisis poses significant risk
According to Kaiko’s head of research, Clara Medalie, the current liquidity situation is “quite dangerous” and could result in massive price volatility in either direction. Medalie warns that “a drop in liquidity certainly helps traders to the upside, but it always ends up being a downside.” The moment the buying pressure subsides, anything can happen to the price.
The liquidity crisis first manifested itself with a $200m drop in 1% market depth after Silvergate’s SEN network was shut down, as identified in Kaiko’s latest research note.
The 1% market depth is calculated by summing the bids and asks within 1% of the mid-price of the top 10 cryptocurrencies. If the market depth is sufficient and the order books are crowded around the market price, it reduces the volatility of the market.
Market depth for Bitcoin and Ethereum remains down 16.12% and 17.64% respectively from their monthly opening levels. Kaiko analyst Conor Ryder wrote that “we are currently at our lowest level of liquidity in the BTC markets in 10 months, even lower than the aftermath of FTX.”
A measure of how easily the biggest cryptocurrency can be bought or sold has fallen to a 10-month low. The drop in liquidity occurs due to the firms that buy and sell crypto losing access to dollar payment systems.
“Liquidity on US exchanges and USD pairs in particular have been hit the hardest thanks to the bank scare,” Ryder said. It looks like a big reason for the recent price rally in BTC was due to illiquidity, when the depth is low there is less support for not only the downside but also the upside as well.
What’s Next for Bitcoin?
The decrease in liquidity has occurred as Silvergate Capital Corp. and Signature Bank, which had deep ties to the crypto industry, have folded in recent weeks, with market watchers on edge for further fallout or turbulence. Everything is happening while crypto prices are skyrocketing.
Bitcoin is up about 70% this year, while other coins have also rallied. Until some clarity emerges in the US, we can probably expect more volatility in the short term, until we get the liquidity boost the markets need.
“The same can happen with shares. Some of the big systematic traders have been triggers for increased volatility, says Aoifinn Devitt, CIO at Moneta.
Investors in the crypto industry are now anxiously waiting to see what happens next for Bitcoin. While the market has weathered storms before, this current liquidity crisis poses significant risks to the stability of the market. It remains to be seen whether Bitcoin’s rally will continue, or whether it will succumb to the liquidity crunch.
