Kaiko: Crypto liquidity situation ‘deteriorating’ amid USD payment rail problem
Analysts at crypto market data provider Kaiko say the crypto market has experienced a “reasonable proportion of liquidity events this month.” In their opinion, although data shows that liquidity in crypto has jumped to levels seen in early March, the situation could get much worse in the long term.
The impact of recent collapses of Silicon Valley Bank and Signature Bank could present a gap in payment networks, Kaiko’s Cody Ryder wrote. This, in turn, can erode confidence among market participants for US suppliers, and affect liquidity and new use of crypto as an asset class,
Low liquidity, more volatility for crypto
As Kaiko researcher Conor Ryder explains in a report shared with Invezz, cryptocurrencies experience the most volatility when liquidity – the ease with which investors can access and easily convert assets into cash without affecting the asset’s market price – is low.
Quite simply, when liquidity is low, prices often lack any robust support and can witness extreme moves to the downside or upside.
For example, Bitcoin (BTC/USD) just had one of its biggest weeks of 2023 with prices trading near $29,000. But the crypto market also saw BTC fall sharply from around $28,765 to the $26,700 region. The fall comes as cryptocurrencies mirrored stocks, with investor reaction across traditional financial markets to the latest FOMC decision reflecting negative sentiment toward the Fed’s 2% target.
How is the liquidity in crypto markets?
The absence of liquidity has been evident in crypto for some time, with the latter driven by contagion from the traditional financial markets. To exemplify the “worsening” situation, Kaiko examined four key metrics – market depth, spreads, volumes and slippage. There is some positivity yes, but the overall outlook underscores the current liquidity across the cryptocurrency market.
In early March, the crypto market saw a $200 million drop in market depth as Silvergate’s problems surfaced and the crypto bank moved to shut down its SEN network. Silicon Valley Bank and Signature Banks subsequently collapsed, affecting market makers around USD settlements and increasing crypto liquidity concerns.
Ryder notes in the report:
“The closure of SEN and the liquidation of Signet, some of the only USD payment rails for crypto, resulted in US exchanges being hit harder from a liquidity standpoint, as market players in the region face unprecedented challenges to their operations.”
While data shows that the liquidity of the top 10 assets has returned to the levels of early March, Bitcoins remains near 10-month lows and the impact of the collapsing fiat-on-ramps could spell further trouble down the road. Despite an increased use of stablecoin pairs as USD pairs are phased out, a lack of new payment networks to replace SEN or Signet could exacerbate the liquidity situation.
To increase confidence in market makers and help attract more liquidity to the market, Ryder says the market needs a new player to fill the gap with the USD payment rail. This could mean further improvement in liquidity and less volatility, which will only increase crypto’s attractiveness as an asset class for more investors.
The crypto market needs this to help start the next bull cycle, the analyst noted.
