Live bitcoin loses liquidity
(Our weekly analysis of the wild world of cryptocurrencies)
By Medha Singh and Lisa Pauline Mattackal
March 28 (Reuters) – Bullish bitcoin has been a surprise winner of the bank blowout. Still, investors aiming to increase their stakes face an ominous obstacle: a lack of liquidity that can trigger wild price swings.
The price of the No. 1 cryptocurrency has jumped 40% to around $27,700 since March 10, when the failure of Silicon Valley Bank (SVB) entered mainstream markets.
On the flip side, however, liquidity is drying up.
Bitcoin’s market depth indicates the asset is at its lowest liquidity level in 10 months, even lower than in the wake of the FTX collapse in November, according to data provider Kaiko. The market depth for the two leading trading pairs — bitcoin-dollar and bitcoin-tether — is 5,600 bitcoin, equivalent to about $155 million, Kaiko said.
“As a market maker, we try to provide liquidity where we can, but we are facing a difficult situation,” said Kevin de Patoul, CEO of Keyrock. “There is a big network effect here. In the short term, at least, liquidity will still be a challenge.”
Slippage, a measure of liquidity that describes how much prices change between placement and execution of a trade, has also increased. Misses to buy bitcoin with US dollars on the Coinbase exchange are 2.5 times higher than they were at the beginning of March, said Conor Ryder, research analyst at Kaiko.
The slip for a $100,000 simulated sell order has doubled in the past month, meaning the average price you get for each bitcoin is worse than a month ago, Kaiko said.
The network effect Patoul was referring to was the collapses of Silvergate Capital and Signature Bank, whose networks had long been used by market makers — who expand liquidity by quickly buying and selling tokens — to trade exchanges.
Lower liquidity usually translates to more volatile markets, especially in crypto. Kaiko’s Ryder said this was possibly a factor behind bitcoin’s leap this month.
CryptoCompare’s Bitcoin Volatility Index rose to 96 last week, much higher than the range of 52 to 65 it saw last month as the cryptocurrency held its ground despite greater market turmoil. The index is currently around 68.
THE ALAMEDA FACTOR
Further shrinking liquidity, Binance – the world’s most liquid crypto exchange – ended zero-fee trading for almost all bitcoin trading pairs last week, hitting market makers’ ability to charge higher fees to execute trades on the platform.
Liquidity for the bitcoin-tether pair on Binance has fallen 70% since the announcement, while trading volumes have fallen 90%, according to Kaiko data.
The disappearing liquidity can be traced back to the collapse of Sam Bankman-Fried’s FTX exchange and hedge fund Alameda Research. Alameda was one of the largest liquidity providers in the crypto industry, and its bankruptcy left a void that has been compounded by the banking sector turmoil of 2023.
While most market players expect new challengers to gradually emerge to perform the network functions of Silvergate and Signature, they say complete replacements are unlikely to emerge overnight.
Until then, “liquidity is probably going to get worse and worse,” said Joseph Edwards, investment adviser at Enigma Securities.
Furthermore, it’s not just problems with market makers that are crushing crypto liquidity; Despite bitcoin’s recent recovery after a prolonged slump, many investors remain cautious in the wake of the banking crises and rising interest rates, some specialists say.
“Even though some players haven’t left the scene, they’re on the sidelines right now because of what’s happening with the banking crisis,” Edwards said.
(Reporting by Medha Singh and Lisa Mattackal in Bengaluru; Editing by Vidya Ranganathan and Pravin Char)
