Crypto Report Says Bitcoin Is In A Liquidity Crisis, Here’s Why

In
a
recent

report,

crypto
research
firm
Kaiko

drew
the
crypto
community’s
attention
to
the
Bitcoin
liquidity
crisis.
The
firm
added
that
this
issue
has
been
amplified
since
the
launch
of
the
US

Spot
Bitcoin
ETFs. 

BTC’s
Liquidity
Fragmentation

Kaiko
analysts
noted
in
the
report
that

liquidity
fragmentation

continues
to
persist
for
the
flagship
crypto,
leading
to
price
discrepancies

across
exchanges.
Simply
put,
liquidity
fragmentation
refers
to
when
liquidity
is
unevenly
distributed
across
these
exchanges,
leading
to
unstable
prices,
especially
among
less
liquid
exchanges. 

Although
this
liquidity
fragmentation
has
reduced
for
Bitcoin
over
time,
the
research
firm
noted
that
it
was
very
apparent
during

last
week’s
sell-off,
which
led
to
the
flagship
crypto

dropping
below
$50,000

for
the
first
time
since
February.
Kaiko
gave
an
example
of
Binance
US,
whose
Bitcoin’s
price
diverged
from
those
on
more
liquid
platforms
during
the
August
5
crypto
crash. 

Furthermore,
Kaiko
noted
that
price
slippage,
one
of
the
best
liquidity
indicators,
tends
to
spike
as
liquidity
dries
up
during
market
sell-offs
like
the
one
on
August
5.
As
expected,
Bitcoin’s
slippage
increased
during
the
August
5
sell-off
and
was
more
pronounced
on
some
exchanges
and
trading
pairs. 

The
research
firm
revealed
that
Japan’s
Zaif
BTC-JPY
trading
pair
had
the
highest
slippage
on
the
sell-off
day,
thanks
to
the

Bank
of
Japan’s

rate
hike.
KuCoin’s
BTC-EUR
pair
suffered
a
similar
slippage,
nearing
almost
5.5%
on
that
day.
Interstingly,
Binance
US
and
BitMEX’s
US-dollar
stablecoin
pairs,
which
are
usually
the
most
liquid
on
crypto
exchanges,
also
experienced
significant
increases
of
over
3%. 

As
Kaiko
noted,
this
liquidity
crisis
doesn’t
only
vary
across
different
exchanges
but
can
also
vary
among
different
trading
pairs
on
the
same
exchange.
For
instance,
in
March,
the
price
of
Coinbase’s
BTC-EUR
pair,
which
is
less
liquid
than
its
BTC-USD
pair,
diverged
significantly
from
the
broader
market
following
heightened
market
activity. 

How
The
Spot
Bitcoin
ETFs
Have
Contributed
To
This
Liquidity
Crisis

Kaiko
also
mentioned
that
liquidity
in
the
BTC-USD
markets
is
increasingly
concentrated
during
weekdays.
This
trend
is
said
to
have
intensified
thanks
to
the

US
Spot
Bitcoin
ETFs,

which
now
hold
a

significant
amount

of
Bitcoin’s
circulating
supply.
Unlike
the
crypto
market,
which
trades
24/7,
these
Spot
Bitcoin
ETFs
still
belong
to
the
traditional
markets,
which
close
on
weekends. 

The
research
firm
noted
that
this
causes
sell-offs
that
start
on
Friday
to
worsen
weekend
uncertainty,
thereby
amplifying
price
impacts.
In
other
words,
prices
tend
to
drop
lower
than
expected
during
weekend
sell-offs
due
to
the
lesser
liquidity. 

Although
weekend
volatility
is
said
to
have
generally
declined
since
2021,
Kaiko
added
that
increased

weekday
trading
concentration

has
heightened
the
“risk
of
sharp
weekend
price
swings
during
market
stress.”
The
research
firm
highlighted
how

Bitcoin
enjoyed
a
14%
price
gain

between
when
the
US
market
opened
on
Monday
and
its
Friday
close
last
week. 

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image
created
with
Dall.E,
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from
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