Bitcoin liquidity drops

Bitcoin, which has been on a rise since the beginning of the year, is currently surprising investors as the liquidity in the crypto market has decreased.

One measure used to assess the ease of buying or selling the biggest cryptocurrency has fallen to its lowest level in 10 months, according to Conor Ryder of Kaiko, who summarizes the bids and asks within the 2% range of the price on both sides of market maker order books.

The reason for the decrease in liquidity is that firms buying and selling crypto can no longer access dollar-payment systems.

Ryder said, "Liquidity for US exchanges and USD pairs, in particular, has been hit hard due to banking fears. It seems that one of the big reasons for the latest price rally for BTC is because of illiquidity.

When the depth is low, it will be difficult to get support not only for the downside but also for the upside."

The drop in liquidity has occurred as Silvergate Capital Corp. and Signature Bank, which have deep connections with the crypto industry, have recently folded, and people are afraid that more bad things could happen.

Many digital-asset firms have used those lenders, while exchanges rely on their services for real-time payments and other things.

Ryder said, "Until they clear things up for the US, we can expect more volatility in the short term until we get the injection of liquidity that markets need."

All of this is happening while crypto prices are skyrocketing. Bitcoin has risen about 70% this year, while other coins have also gained.

Analysts say the turmoil in the financial sector has pushed investors to digital tokens that some people say are separate from any trouble that US and European banks might face.

This is an old narrative surrounding Bitcoin that has resurfaced recently, but not everyone believes it is causing the crypto rally. K33's Torbjørn Bull Jenssen, Bendik Schei, and Anders Helseth write in a note that "Bitcoin has surged amidst the backdrop of bank collapses and fears of contagion."

However, they say it is not clear whether the coin is acting as a safe-haven asset or "simply reacting to expectations of potentially lower interest rates."
They say Bitcoin still behaves like a high-beta risk asset.

The Nasdaq 100, for example, has also risen in recent weeks. "On the other hand, Bitcoin has strongly outperformed Nasdaq, gained market share relative to even higher risk crypto assets, and risen together with gold, which is perceived as a classical safe haven asset," they write.

Crypto trading volumes have decreased after FTX's collapse as investors have left the market due to fear. Trading volumes have recovered as prices have risen this year, but they have not reached the record levels they had before.

However, the crypto market may be prone to greater volatility as ownership of coins is concentrated among a few investors, according to Aoifinn Devitt, CIO at Moneta. "Ownership is more concentrated there, so when you don't have broad-based ownership, you can get more volatility. The same thing can happen with stocks. Some of the large systematic traders can be triggers for heightened volatility," she said.