Bitcoin liquidity crisis gets worse, what it means for the price

Conor Ryder, researcher at digital asset data provider Kaiko, has examined the liquidity of the Bitcoin and crypto markets in a new study, and found that the liquidity situation in crypto has worsened further this month following the bank scares. Bitcoin liquidity fell to a 10-month low as market participants lost access to USD payment rails.

What the Liquidity Crisis Means for the Bitcoin Price

Most importantly, this means that the Bitcoin market becomes increasingly volatile when liquidity is low. Prices have less support on both the downside and the upside, which Ryder says could explain Bitcoin’s rapid rally since the beginning of the month.

Ryder shared the chart below in his analysis, explaining that liquidity in the BTC markets is even significantly lower than it was after the FTX and Alameda collapses. Kaiko refers to the drop in liquidity at the time as the “Alameda gap,” which was created by the absence of one of the industry’s largest market players.

“That gap has yet to be filled, and with the banking problems of late, liquidity has taken another hit,” notes Ryder, who also observed that the closure of the Silvergate Exchange Network (SEN) and the winding down of Signet have resulted in US exchanges being hit harder than non-US exchanges from a liquidity perspective.

This is because market makers in the US now face “unprecedented challenges” for their business. “We can see the difference in reaction between US and non-US exchanges with more severe reactions to some of the liquidity issues over the past month,” Ryder said.

But the analyst also has good news. Liquidity has now recovered to levels as early as March 2022. Still, he warns that the loss of easy fiat access could have long-term implications.

According to Ryder, the blow the US crypto industry has taken can also be seen in other metrics. Spreads for USD pairs suffer from higher volatility due to the uncertainty, as does slippage:

On a $100,000 sell order, Coinbase’s btc-usd pair is up 2.5 times the slide it started the month at Binance’s btc-usdt pair’s slide meanwhile barely moved.

Ex-Coinbase CTO Balaji S. Srinivasan, who is currently in the spotlight with his $1 million bet on Bitcoin, tired citing Ryder’s research:

Interestingly, as the liquidity of the Bitcoin markets decreases under government pressure, it takes less buying to make USD/BTC take off.

I don’t think the state can close it completely, but we shouldn’t wait. Paradoxically, closing the exit makes the exit more desirable in more ways than one.

At press time, the Bitcoin price stood at $28,176, against the major resistance zone above $28,300.

Featured image from iStock, chart from TradingView.com