Weak Bitcoin Market Liquidity Keeps Crypto Whales At Bay
- Nanna Course
- on Jan 10, 2023
Crypto whales, or big traders, remain on the fringes of bitcoin (BTC) despite a risk reset in traditional markets, as low liquidity makes it difficult to trade without impacting the price of the cryptocurrency.
Signs of growing risk appetite, stocks rallied as the US dollar took a hit on optimism that China’s reopening is gaining momentum and the Federal Reserve could be about to end its liquidity tightening cycle. In the realm of crypto, however, market depth – a measure of an asset’s price resistance to large orders – is relatively low and daunting.
“Aggregated market depth of 2% BTC fell by almost half to around 8,000 BTC from 14,000 BTC at the end of October,” wrote analysts at Bitfinex, one of the top 10 centralized cryptocurrency exchanges in volumes, in the January 9 issue of the market report. “In other words, a large order of the same USD value or size placed today will have more than double the price impact compared to two months ago.”
Crypto experts typically follow the 2% market depth to gauge liquidity conditions. The gauge represents a collection of buy and sell orders within 2% of the average price – the average of the bid and ask/ask prices being quoted at any given time.
“This is very disheartening for whales and large trading companies that actively trade crypto only as an alternative exchange-listed market,” the analysts said.
The chart, sourced from Paris-based Kaiko Research, shows bitcoin’s 2% market depth on major exchanges, including Bitfinex, fell from around 11,000 BTC to around 6,000 BTC after the FTX exchange in Sam Bankman Fried, formerly the third tallest in the world, and her sister. concern Alameda Search went bankrupt beginning of November.
The depth has since remained below 10,000 BTC.
“Alameda Research was one of the biggest market makers in crypto, providing billions of dollars of liquidity for high and low cap tokens. We now know that the entire trading operation was funded by funds diverted directly from FTX clients,” Kaiko analysts said in the latest quarterly review, calling the shallow market depth “the Alameda liquidity gap.”
Other significant market makers like Wintermute, Genesis and Amber Group were also exposed to FTX and were affected by the failure of the exchange.
The reluctance of whales to participate in the market due to low liquidity is evident in the decline in daily trading volumes on centralized exchanges (CEX).
“While daily CEX volume has always fluctuated, the period between November 25 and December 25 saw the lowest aggregate daily trading volume over a 30-day period (discounting the holiday period to avoid distorting data),” Bitfinex analysts said, citing data from Kaiko.
BTC, the most liquid cryptocurrency
Bitcoin, the world’s largest digital asset by market capitalization, remains the most liquid cryptocurrency. Whales will therefore likely prefer it over other coins when they return to the crypto market.
The chart above from Kaiko Research compares the top 28 tokens by market value with their respective liquidity rankings, calculated using market depths, bid-ask spreads, and trading volumes.
The dog-themed cryptocurrency DOGE, which is very popular among retail investors, Polygon’s MATIC scaling solution, and Chainlink’s LINK have better liquidity rankings than their market caps.