CFTC-Binance lawsuit could worsen crypto market liquidity, drag Bitcoin down to $25K: Observers

Poor liquidity, a problem that has plagued crypto markets since the collapse of FTX in November, could worsen and breed price volatility as regulators go after dominant exchange Binance.

On Monday, the US Commodity Futures Trading Commission (CFTC) sued Binance for running an alleged “illegal exchange” and a “sham” compliance program. The regulator, which is responsible for overseeing commodity and derivatives markets, including derivatives linked to bitcoin (BTC), sued Binance CEO Changpeng Zhao and former top executive Samuel Lim, alleging “willful evasion” of US law.

Binance has long been the leading digital asset exchange and accounted for a much larger share of global trading volumes than its former rival FTX. Per Morgan Stanley, the exchange accounted for 81% of the total BTC traded on centralized exchanges in February. according to case documentis a single trader from Chicago responsible for 12% of the total trading volume on Binance.

Observers are therefore concerned that the lawsuit will lead to a deeper decline in market liquidity – a measure of how difficult or easy it is to trade large quantities at stable prices.

“The biggest concern is what this will do in the short term to market liquidity – if market makers back out of trading on Binance now, and if Binance’s US-based trading desk has to stop operations, it will reduce liquidity in an already thin market,” Noelle Acheson , the author of the popular Crypto is Macro Now newsletter, said.

“That will exacerbate volatility and could keep some big players on the sidelines for a while longer,” Acheson added.

Liquidity is largely measured using a metric called 2% market depth – a collection of buy and sell orders within 2% of the mean price or average of the bid and ask/offer prices.

The greater the market depth, the less likely it is that large buy/sell orders will cause significant deviations in the asset’s market price. Market makers are entities that provide liquidity to a financial market by creating buy and sell orders that are not executed immediately.

Bitcoin’s market depth of 2% fell to a ten-month low last week, extending the deterioration since FTX’s sister firm Alameda Research, formerly one of the biggest market players, closed shop five months ago.

The situation will persist for some time, according to DRW subsidiary Cumberland, one of the earliest and longest standing crypto market makers.

“This lawsuit will certainly exacerbate the tightness of the already strained digital asset banking system and, as a consequence, harm liquidity,” Cumberland said in a chirping explain the impact of regulatory measures on the market.

Some observers expect bitcoin to visit the previous resistance that was supported near $25,000 in the wake of the increased regulatory uncertainty.

“It’s clear that the CFTC wants oversight of all crypto exchanges. It’s nothing new, but the market is reacting cautiously and we’re still holding our breath for further negative news, which could push BTC down,” Kssis told CoinDesk.

Long straight [liquidations]which increased yesterday will inevitably push prices down, possibly below support near $25,000,” Kssis added.

Bitcoin fell over 3% on Monday, hitting lows near $26,500 in response to the CFTC’s crackdown on Binance. The cryptocurrency has since stabilized around $27,000, after setting a nine-month high of $28,889 on March 23, CoinDesk data shows.

Derivatives exchanges on Monday liquidated or forcibly closed bullish long futures positions worth more than $25 million, up sharply from Sunday’s $3.6 million figure, according to Glassnode. Meanwhile, short liquidations totaled just $7 million. Forced closing of long/short positions often contributes to bearish/bullish pressure around the cryptocurrency.

According to Acheson, the lawsuit is not good news for market valuation, as it adds “another layer of uncertainty and does not bode well” for the ecosystem, which comes on the heels of another high-profile scam.

However, Acheson anticipates recent macroeconomic developments that raised expectations of a quick Fed pivot in favor of rate cuts to cushion markets from the negative impact of the Binance news.

“For BTC, ETH and other majors, we are seeing some selling interest supported by buyers coming in – this is a very different market to November, with a pivot in sight and new narratives motivating new types of investment decisions,” Acheson noted. “Psychologically, it’s not as much of a blow as the FTX implosion since the market has been warned repeatedly that something like this was coming.”