Bitcoin Cash (Bitcoin) and Ethereum (ETH) Exchange-traded funds (ETFs) in the United States have helped improve liquidity in the cryptocurrency market, but it is still not enough to absorb greater volatility, according to a Kaiko report on August 29.
Kaiko said liquidity has improved significantly since FTX’s collapse in November 2022, with daily trading volume across the top 10 crypto exchanges increasing by 30% over the past year.
However, the report adds that trading volume alone is not the most reliable indicator of liquidity, as volumes can be heavily influenced by fees and incentives offered by trading platforms.
Not ready for major impacts
Kaiko analysts found that trading volume should be associated with market depth, which is the ability to maintain relatively large market orders without impacting the price of the asset. As a result, the market volume/depth ratio gives a more accurate picture, as volume can far exceed liquidity fueled by wash trading.
Applying this ratio, Kaiko found that the cryptocurrency market is not yet ready to face major impacts. The effects of low liquidity were seen recently when bitcoin orders faced significant slippage during the August 2 stock market crash after the Bank of Japan suddenly hiked rates.
Slippage occurs when there is not enough liquidity available to absorb a market order at a certain price, negatively affecting trading results. Some trading pairs, such as KuCoin’s BTC-EUR, saw more than 5% slippage on the day.
Further, the report also identified variations in slippage at different times of the day, which also suggests a lack of adequate liquidity in the current market condition.
Overabundance of supply
Kaiko also noted that an “oversupply” continues to put pressure on liquidity in crypto markets. The term refers to the amount of cryptocurrencies that could be dumped into the market, causing prices to drop.
The first example Kaiko mentions is the Mt. Gox estate, which has over 46,000 BTC – worth over $2 billion – to redistribute.The report noted that the distribution of the first batch was followed by a massive spill.
Additionally, the governments of the United States, the United Kingdom, China, and Ukraine hold bitcoins, which can be sold at any time, as evidenced by Germany’s recent selling spree. The U.S. government alone owns over 200,000 bitcoins spread across various wallets.
