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Crypto market faces ongoing liquidity challenges following ETF developments, according to Kaiko.
Spot Bitcoin (BTC) and Ethereum (ETH) exchange-traded funds (ETFs) in the United States have contributed to enhanced liquidity in the cryptocurrency market; however, it remains insufficient to manage larger volatility, as stated in a report by Kaiko on August 29.
According to Kaiko, liquidity has notably improved since the collapse of FTX in November 2022, with the daily trading volume of the top 10 cryptocurrency exchanges increasing by 30% over the past year.
Nonetheless, the report emphasized that trading volume alone is not the most dependable indicator of liquidity, as volumes can be significantly affected by the fees and incentives provided by trading platforms.
Not prepared for significant impacts
Kaiko analysts discovered that trading volume should be analyzed alongside market depth, which refers to the capacity to handle relatively large market orders without affecting the asset’s price. Consequently, the volume-to-market depth ratio offers a more precise representation, as volume can greatly exceed liquidity driven by wash trading.
Utilizing this ratio, Kaiko concluded that the cryptocurrency market is not yet equipped to withstand major impacts. The consequences of low liquidity were recently observed when Bitcoin orders experienced considerable slippage during the market downturn on August 2, following the unexpected rate hike by the Bank of Japan.
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Slippage occurs when there is insufficient liquidity to accommodate a market order at a specific price, adversely impacting trading outcomes. Certain trading pairs, such as KuCoin’s BTC-EUR, experienced slippage exceeding 5% on that day.
Additionally, the report highlighted variations in slippage at different times of the day, further indicating a lack of adequate liquidity in the current market conditions.
Supply overhang
Kaiko also pointed out that a “supply overhang” continues to apply pressure on the liquidity of the cryptocurrency markets. This term refers to the volume of cryptocurrency that could potentially be sold in the market, leading to price declines.
The first example cited by Kaiko is the estate of Mt. Gox, which possesses over 46,000 BTC—valued at more than $2 billion—remaining to be redistributed. The report noted that the distribution of the first batch was followed by a significant sell-off.
Moreover, governments such as the United States, the United Kingdom, China, and Ukraine hold Bitcoin, which could be liquidated at any moment, as demonstrated by Germany’s recent selling activity. The US government alone possesses over 200,000 BTC distributed across various wallets.
The post Crypto market continue to struggle with liquidity post-ETFs despite improvements – Kaiko appeared first on CryptoSlate.
