Bitcoin (BTC) and Ethereum (ETH) liquidity conditions are at their lowest since the Terra crash in May 2022.
Liquidity conditions in the Bitcoin and Ethereum markets continue to deteriorate and the situation is now more alarming than it was three months ago. This causes investors to worry about sudden price fluctuations in the crypto market.
BTC Market Depth at Lowest Since May 2022
Liquidity refers to the market’s ability to meet large buy and sell orders at stable prices. The metric commonly used to evaluate liquidity conditions is 2 percent of market depth. The more important the depth, the more liquid an asset is said to be.
Data from Paris-based crypto data provider Kaiko shows that Bitcoin’s 2% market depth for USDT pairs collected from 15 centralized exchanges has fallen to 6,800 BTC, the lowest level since May 2022, surpassing the low it experienced after the FTX bankruptcy. is showing. This is significantly lower than the October high of 15,000 BTC. Ethereum’s 2% market depth, on the other hand, has halved since October, reaching 57,000 ETH, led by Binance.
Commenting on the subject, Astronaut Capital Chief Investment Officer Matthew Dibb said: “Low liquidity means harder moves, especially in alternative cryptocurrencies.” used expressions.
“Funds trying to size trade are forced to TWAP over longer periods of time, which is why some charts like STX seem to have been executed recently,” Dibb added.
TWAP is an algorithmic strategy that focuses on obtaining an execution price close to the time-weighted average price of the asset. In other words, it is a strategy for dividing a large order into smaller quantities and minimizing their impact on the market and reducing slippage.
The slippage is the difference between the expected price for a trade and the actual price at which the trade is executed. Slippage usually occurs in situations of low market liquidity or high volatility.
Commenting on this situation, Matthew Dibb used the following expressions: “Decreased market depth means that most large funds are not staying at the same level as before due to the amount of slip involved.”
The latest drop in market depth coincided with expectations of diminishing volatility in the Bitcoin market. According to Griffin Ardern, an investor in crypto asset management firm Blofin, this type of situation often leads to a sudden burst of volatility.
The Bitcoin Volatility Index (BVIN), which measures expected volatility over the next 30 days, has dropped to 56.39, its lowest level since at least the start of 2021, according to data source CryptoCompare.
According to data tracked by Amberdata, the gap between Bitcoin’s seven-day expected volatility and seven-day actual volatility has turned negative. Short-term volatility indicates that expectations are underpriced.
Ardern: “It creates an environment conducive to high volatility, and since the depth is low, only a small amount of buy/sell orders is sufficient to affect the price. As a result, the hedging activity of market makers increases market volatility.”
Market makers always take the opposite side of investors’ trades and maintain a market-independent portfolio by buying and selling the underlying asset as the price fluctuates. Hedging activities are known to affect the spot market price of Bitcoin and could have a huge impact this time around due to the low market depth.
Crypto market liquidity began to decline after Alameda Research and FTX went bankrupt in November. Alameda was one of the leading market makers providing billions of dollars of liquidity to small and large volume tokens. The company’s bankruptcy collapsed many trading activities, including arbitrage and high-frequency trading firms, and hurt leading market makers like Genesis.
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