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Bitcoin

Crypto Report Says Bitcoin Is In A Liquidity Crisis, Here’s Why

Scott Matherson
by Scott Matherson
1 year ago
·
Posted in Bitcoin
Trusted Editorial content, reviewed by leading industry experts and seasoned editors. Ad Disclosure

In a recent report, crypto research firm Kaiko drew the crypto community’s attention to the Bitcoin liquidity crisis. The firm added that this issue has been amplified since the launch of the US Spot Bitcoin ETFs. 

BTC’s Liquidity Fragmentation

Kaiko analysts noted in the report that liquidity fragmentation continues to persist for the flagship crypto, leading to price discrepancies across exchanges. Simply put, liquidity fragmentation refers to when liquidity is unevenly distributed across these exchanges, leading to unstable prices, especially among less liquid exchanges. 

Related Reading: Shiba Inu Records 240% Spike In This Key Metric

Although this liquidity fragmentation has reduced for Bitcoin over time, the research firm noted that it was very apparent during last week’s sell-off, which led to the flagship crypto dropping below $50,000 for the first time since February. Kaiko gave an example of Binance US, whose Bitcoin’s price diverged from those on more liquid platforms during the August 5 crypto crash. 

Bitcoin 1
Source: Kaiko

Furthermore, Kaiko noted that price slippage, one of the best liquidity indicators, tends to spike as liquidity dries up during market sell-offs like the one on August 5. As expected, Bitcoin’s slippage increased during the August 5 sell-off and was more pronounced on some exchanges and trading pairs. 

Bitcoin 2
Source: Kaiko

The research firm revealed that Japan’s Zaif BTC-JPY trading pair had the highest slippage on the sell-off day, thanks to the Bank of Japan’s rate hike. KuCoin’s BTC-EUR pair suffered a similar slippage, nearing almost 5.5% on that day. Interstingly, Binance US and BitMEX’s US-dollar stablecoin pairs, which are usually the most liquid on crypto exchanges, also experienced significant increases of over 3%. 

As Kaiko noted, this liquidity crisis doesn’t only vary across different exchanges but can also vary among different trading pairs on the same exchange. For instance, in March, the price of Coinbase’s BTC-EUR pair, which is less liquid than its BTC-USD pair, diverged significantly from the broader market following heightened market activity. 

How The Spot Bitcoin ETFs Have Contributed To This Liquidity Crisis

Kaiko also mentioned that liquidity in the BTC-USD markets is increasingly concentrated during weekdays. This trend is said to have intensified thanks to the US Spot Bitcoin ETFs, which now hold a significant amount of Bitcoin’s circulating supply. Unlike the crypto market, which trades 24/7, these Spot Bitcoin ETFs still belong to the traditional markets, which close on weekends. 

Related Reading: Here’s How Many Dogecoin Investors Are In Profit Following That Price Crash

The research firm noted that this causes sell-offs that start on Friday to worsen weekend uncertainty, thereby amplifying price impacts. In other words, prices tend to drop lower than expected during weekend sell-offs due to the lesser liquidity. 

Bitcoin 3
Source: Kaiko

Although weekend volatility is said to have generally declined since 2021, Kaiko added that increased weekday trading concentration has heightened the “risk of sharp weekend price swings during market stress.” The research firm highlighted how Bitcoin enjoyed a 14% price gain between when the US market opened on Monday and its Friday close last week. 

Bitcoin price chart from Tradingview.com
BTC price retraces from $60,000 | Source: BTCUSD on Tradingview.com
Featured image created with Dall.E, chart from Tradingview.com
Editorial Process for bitcoinist is centered on delivering thoroughly researched, accurate, and unbiased content. We uphold strict sourcing standards, and each page undergoes diligent review by our team of top technology experts and seasoned editors. This process ensures the integrity, relevance, and value of our content for our readers.
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Scott Matherson

Scott Matherson

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Scott Matherson is a leading crypto writer at Bitcoinist, who possesses a sharp analytical mind and a deep understanding of the digital currency landscape. Scott has earned a reputation for delivering thought-provoking and well-researched articles that resonate with both newcomers and seasoned crypto enthusiasts. Outside of his writing, Scott is passionate about promoting crypto literacy and often works to educate the public on the potential of blockchain.

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