Bitcoin’s double-digit surge this year has astounded investors, but liquidity in crypto marketplaces has dried up.
According to Conor Ryder of Kaiko, who summed up the bids and offers on both sides of market maker order books, one indicator of how easily the largest cryptocurrency can be purchased or traded has plunged to 10-month lows.
The reduction in liquidity is caused by enterprises that purchase and sell cryptocurrency losing access to dollar payment channels.
“Liquidity on US exchanges and USD pairs in particular have been hardest hit thanks to the banking fears,” Ryder said.
“It looks as if a big reason for the latest price rally in BTC was due to illiquidity, when depth is low, there is less support to not only the downside but also the upside as well.”
Liquidity has dwindled as Silvergate Capital Corp. and Signature Bank, both of which have extensive ties to the crypto business, have gone bankrupt in recent weeks, leaving market participants on alert for any further repercussions or instability.
Numerous digital-asset corporations had banked with them, and exchanges had used their services for real-time payments, among other things.
“Until some clarity appears in the US, we can probably expect more volatility in the short term, until we get that injection of liquidity that markets need,” Ryder said.
All of this is happening while cryptocurrency values climb.
This year, Bitcoin has increased by nearly 70%, while other currencies have also increased.
According to analysts, the financial sector’s upheaval has driven investors into digital tokens, which proponents argue are distinct and separated from the turbulence hitting US and European institutions.
That’s an old Bitcoin story that’s made a reappearance in recent weeks, but not everyone believes it’s the major reason the cryptocurrency has been climbing.
“Bitcoin has surged amidst the backdrop of bank collapses and fears of contagion,” wrote K33’s Torbjørn Bull Jenssen, Bendik Schei and Anders Helseth in a note this week.
The trio cautioned, though, that it’s unclear if the currency is operating as a safe-haven asset or is “simply reacting to expectations of potentially lower interest rates.”
Yet, they claim, Bitcoin continues to behave like a high-beta risk asset – the Nasdaq 100, for example, has recently surged.
“On the other hand, Bitcoin has strongly outperformed Nasdaq, gained market share relative to even higher risk crypto assets, and has risen together with gold, perceived as a classical safe haven asset,” they wrote.
Crypto trading volumes fell in the aftermath of FTX’s demise, as investors fled from the market, alarmed by the demise of one of the industry’s previously admired enterprises.
Trade volumes have improved as prices have risen this year, albeit they are still far from recent highs.
Yet, the crypto market may be more volatile since coin ownership is concentrated among a limited number of investors, according to Aoifinn Devitt, CIO of Moneta.
“Ownership is more concentrated there, so when you don’t have that broad-based ownership, you can get more volatility,” she said.
“The same thing may be happening with stocks. Some of the large systematic traders have been triggers for heightened volatility.”
