Bitcoin liquidity dries up as crypto ‘tourists’ recoil from industry disruption

by James · April 2, 2023

(Bloomberg) — By just about any measure, Bitcoin liquidity remains low, despite the cryptocurrency’s eye-popping rise this year.

Most read from Bloomberg

Investors have paid more on trades due to slippage, or the difference between the expected price of a transaction and the price at which it completes, a sign of deteriorating liquidity, according to Conor Ryder at Kaiko. The higher the difficulty of trading, the more investors are exposed to potential volatile price swings.

This can happen due to a change in the bid-ask between the time a trade is placed and filled, or when there is insufficient depth in the order book to support large orders.

Although a rally in Bitcoin this year made it the best-performing asset in the first quarter, a growing US regulatory crackdown and the collapse of a few crypto-adjacent banks have dampened some investors’ enthusiasm.

“It’s more indicative of the institutional reluctance to provide liquidity in the space,” said Ryder, a research analyst at the Paris-based firm. Many crypto firms do not want to be caught in the middle of a battle between US regulators and exchanges.”

Although prices have rallied in early 2023, trading volume and liquidity in the crypto market have dried up over the past year amid an overall price decline, which has seen Bitcoin fall around 38% – to around $28,000 – and some other coins even more. Investors pulled back during that period as a series of scandals scared them away. Analysts are now particularly attuned to how smaller retail investors might behave as they have been an integral part of the system, helping to drive up prices during the early pandemic boom.

“The tourists are definitely gone,” said Mark Connors, head of research at digital asset management company 3iQ. “If you’re in this, you have to understand that the volatility is there, you don’t know where it’s going from day to day, but you understand the trajectory, the adoption, etc.”

Spot volumes on some of the most popular crypto exchanges also help tell this story. Binance, the largest trading platform, at the end of March had a normalized 24-hour trading volume of more than $6 billion, with monthly visits of around 65 million. By comparison, Coinbase, the second largest, saw trading volume of about $1.3 billion, with roughly 33 million monthly visits, according to CoinGecko data and figures compiled by the company.

Bitcoin trading volumes have collapsed, “which inevitably makes for a more volatile market,” said Fiona Cincotta, senior financial market analyst at City Index. “The sharp drop in volumes means it is easier for large orders to move BTC prices. So sit tight, there may be more wild swings.”

She added: “Falling volumes point to waning appetite for Bitcoin at recent highs amid easing concerns around the banking sector and as crypto regulation comes under the spotlight.”

Read more: Crypto’s most powerful man has more than ‘FUD’ to worry him now

In recent days, news emerged that the US Commodity Futures Trading Commission sued founder Changpeng Zhao and his Binance cryptocurrency exchange for alleged violations of derivatives regulations. Binance has said it disagreed with the characterization of many of the issues alleged in the complaint.

“It remains to be seen how the case will affect Binance’s business,” said Strahinja Savic, head of data and analytics at FRNT Financial. “In this context, the liquidity status quo in the crypto space has not been affected by the costs.”