Crypto Market Liquidity Dwindling, Sparks Concern Among Traders

The Bitcoin (BTC) and Ethereum (ETH) industries have a combined crypto market dominance of approximately 61 percent. Most of the altcoin and the stablecoins industries significantly depend on the success of the top two digital assets. As such, market analysts closely monitor the liquidity of the top two digital assets to understand how well the industry is performing.

A significant drop in Bitcoin and Ethereum’s liquidity means crypto whales are bound to struggle to trade large volumes. On the other hand, deep liquidity means cryptocurrency traders can exchange their coins without underlying prices fluctuating significantly.

The fall of Alameda Research, a sister crypto firm to the FTX exchange, significantly contributed to the crypto liquidity crunch that most traders face.

Notably, the commonly used metric for assessing crypto liquidity conditions is 2 percent of market depth – a collection of buy and sell offers within 2 percent of the mid-price or the average of the bid and the ask/offer prices.

Analysts Warn Thin Liquidity in Bitcoin and Ether

According to aggregate data from Paris-based crypto firm Kaik, Bitcoin’s 2 percent market depth for Tether USDT pairs aggregated from 15 centralized exchanges has slipped to 6,800 BTC, the lowest since May 2022, surpassing the post-FTX low.

“Thin liquidity means more drastic moves, particularly in alternative cryptocurrencies,” Matthew Dibb, chief investment officer at Astronaut Capital, said.

Dibb added that fund managers are forced to wait more extended periods, days or weeks, for large trades to be executed. 

“Realistically though, dwindling market depth has also meant that most large funds have not been participating at the same level as previous due to the amount of slippage associated,” Dibb noted

As a result, the analyst expects more volatility ahead, particularly in the altcoin market, which has lower liquidity.