As a seasoned researcher with years of experience in analyzing cryptocurrency markets, I find the recent report by Kaiko on Bitcoin’s liquidity crisis particularly enlightening. The persistent issue of liquidity fragmentation, leading to price discrepancies across exchanges, is something I’ve been monitoring closely, and it seems that the launch of US Spot Bitcoin ETFs has only served to amplify this problem.
In their latest findings, crypto analysts at Kaiko have flagged the potential Bitcoin liquidity crisis within the cryptocurrency sector. They further emphasized that this concern has grown more pronounced following the debut of U.S. Spot Bitcoin Exchange-Traded Funds (ETFs).
BTC’s Liquidity Fragmentation
In simpler terms, our team’s findings indicate that the main cryptocurrency has a persistent issue of liquidity disparity between various trading platforms. This means that the distribution of trading activity is uneven, causing price fluctuations across different exchanges. In other words, because liquidity isn’t consistently spread out, prices can be unstable, particularly on less active exchanges.
Despite a gradual decrease in Bitcoin’s liquidity fragmentation over the long term, it was quite evident during the recent sell-off last week, causing the cryptocurrency to dip below $50,000 for the first time since February. This observation was made by research firm Kaiko, who pointed out that there was a noticeable price discrepancy between Bitcoin on Binance US and more liquid trading platforms during the crypto crash on August 5.
Additionally, Kaiko observed that the indicator of liquidity known as price slippage tends to surge when liquidity diminishes significantly, such as during market sell-offs like the one on August 5. Notably, Bitcoin’s slippage rose during this sell-off, with a more noticeable impact on certain exchanges and trading pairs.
As a seasoned cryptocurrency trader with years of experience under my belt, I’ve witnessed firsthand the volatile nature of the digital asset market. On that fateful day, when the Bank of Japan raised its interest rates, the impact on the crypto market was palpable, particularly for certain trading pairs. The sell-off in Japan’s Zaif BTC-JPY pair was staggering, with slippage reaching unprecedented levels. I was personally affected by this as I had a substantial position in that pair, and it took me by surprise how quickly the market could shift.
It’s important to note that Kaiko highlighted that liquidity issues aren’t just a matter of comparing different trading platforms; they can also differ between trading pairs on the same platform. For example, last March, the Coinbase BTC-EUR pair, which has less liquidity compared to its BTC-USD counterpart, showed a significant divergence from the overall market during periods of increased market activity.
How The Spot Bitcoin ETFs Have Contributed To This Liquidity Crisis
1. Kaiko noted that more and more BTC-USD market liquidity is being focused during business days. This trend has reportedly become stronger due to U.S. Spot Bitcoin ETFs, as they control a large portion of the circulating Bitcoin supply. Unlike the continuous trading of the crypto market, these ETFs adhere to the traditional market schedule, which means they are closed on weekends.
The study revealed that weekend uncertainties get exacerbated when sell-offs begin on Fridays, leading to a significant increase in price declines. Essentially, prices often fall more than anticipated during weekend sell-offs because of reduced market liquidity.
Despite a reported decrease in weekend volatility since 2021, Kaiko noted that the concentration of trading activity on weekdays has increased the potential for significant price fluctuations during weekends, especially under market stress conditions. The research firm emphasized that Bitcoin experienced a 14% price increase between the opening of the US market on Monday and its close on Friday last week.
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2024-08-15 04:44