Bitcoin’s Price Swings Intensified by Low Liquidity
The recent fluctuations in the price of Bitcoin, with swings of over 10%, can be attributed to the prolonged scarcity of liquidity in cryptocurrency markets.
Market depth remains at its lowest this year, although a recent recovery in trading has been fueled in part by expectations for a Bitcoin exchange-traded fund, FalconX’s research team found. They measure market depth by looking at the average amount of Bitcoin trading within 1 percent of its current price every 24 hours.
The drop in overall liquidity was dubbed the “Alameda Gap” by blockchain data firm Kaiko last November. Alameda Research was the trading arm of Bankman-Fried’s failed FTX digital empire. The lingering effect is largely due to the huge losses that market makers suffered after the FTX crash, according to researchers at Kaiko. The Bankman-Fried fraud trial continues today.
On October 16, Bitcoin jumped more than 10% in a matter of minutes after a false report circulated that the United States had approved a long-awaited ETF that invests directly in the cryptocurrency. It removed most of the increase just as quickly, when BlackRock said its application was still with the SEC.
A similar spike was seen on Oct. 23, when traders speculated that the listing of the proposed BlackRock fund’s ticker suggested approval was imminent. The combination pushed Bitcoin above $35,000 for the first time in about 18 months. Bitcoin was little changed at around $34,540 in New York on Monday.
“It’s hard to attach just one story to the recent rally,” said Juthica Mallela, head of options trading at crypto exchange Kraken. “It is possible that the price movements are due to a combination of market position, spot buying and a broadly positive macro landscape for Bitcoin, which includes a spot Bitcoin ETF on the horizon.”
Meanwhile, Patrick Chu, head of institutional sales for Asia-Pacific at crypto derivatives liquidity provider Paradigm, noted that the company had a record two-day volume of more than $2 billion last week.
“The market has picked up massively in the last week as volatility is reawakening,” Chu said. “Market short gamma over $30k in BTC run prices, lots of guys covering the risk.”
However, according to data collected by the crypto research company Delphi Digital, the total trading volumes of centralized and decentralized exchanges in the spot market are at their lowest level in several years.
The market capitalization of stablecoins is another metric used by analysts to measure the health of market liquidity, as stablecoins are used as key on- and off-ramps for crypto traders. They are usually pegged to another currency, most often the dollar. The market value of stablecoins has been declining, according to data from Tracker DeFiLlama.
One reason the digital asset market is not attracting new money may be the rising interest rate environment. Decentralized finance, whether it’s peer-to-peer lending or automated market makers, once lured investors with promises of double- or triple-digit returns in an ultra-low interest rate environment in the era of the Covid-19 pandemic. Now they are struggling, as traditional financing returns are more attractive and less risky.
“The main reason why liquidity continues to flow out, as opposed to into the crypto market, is due to high interest rates,” Delphi Digital analyst Michael Rinko said in a direct message.
