Crypto analysts are speculating that Bitcoin’s (BTC) recent surge could have been driven by an ongoing shortage of liquidity and declining market capitalization of stablecoins, which has led to the crypto market depth remaining at a yearly low.
According to research by analysts at institutional crypto trading platform FalconX, the average volume of BTC trades within a 1% price range from its current value, on a 24-hour basis, has been at its lowest in 2023. This is despite the renewed surge in trading activity partly ignited by the market’s expectation surrounding the potential approval of a Bitcoin exchange-traded fund (ETF) in the US spot market.
Analysts Say Drop In Crypto Market Liquidity Caused by FTX Collapse
Blockchain analytics firm Kaiko attributed the drop in overall liquidity in the crypto market to the collapse of Alameda Research last November. The phenomenon now dubbed the “Alameda Gap” is the lingering effect as a result of the huge losses that market makers incurred following the implosion of the FTX cryptocurrency exchange.
Alameda Research was the trading arm of the exchange founded by crypto conman and former billionaire Sam Bankman-Fried, who is currently facing a fraud charge for his involvement in the pyramid scheme that saw customers and investors collectively lose $10 billion.
In an X post, Kaiko noted that the Alameda Gap in crypto liquidity could be felt for a long time in the market as BTC’s market depth across various exchanges plummeted over the past week.
Bitcoin Prices Surge in Anticipation of an Immenient Spot ETF Approval
On October 16, a report by the crypto news outlet Cointelegraph falsely claimed that the US Securities and Exchange Commission (SEC) had approved BlackRock’s highly-anticipated Bitcoin spot ETF, resulting in BTC temporarily spiking 10% in price. But the excitement was short-lived after the investment management giant clarified that its application was still under the securities regulator’s review, leading to the price of Bitcoin dropping by 3%.
Just a week later, on October 23, Bitcoin soared past the $35,000 mark for the first time in 18 months after traders spotted the ticker for BlackRocks iShares spot Bitcoin ETF on the Depository Trust and Clearing Corporation’s (DTCC) website, indicating that an approval for the investment vehicle was imminent.
Speaking about the rally, Judith Mallela, head of over-the-counter options trading at crypto exchange Kraken, said that it was difficult to ascribe Bitcoin’s recent surge to a single narrative. She noted that the price movements could have stemmed from a combination of market positioning, spot buying, and a “broadly positive macro landscape” for Bitcoin that includes the prospect of a spot BTC ETF “on the horizon”.
Meanwhile, Patrick Chu, head of institutional sales coverage in Asia Pacific for Paradigm, a crypto derivatives liquidity provider, said the company had a two-day record liquidity volume above $2 billion. Chu noted that the market has picked up “massively” in the last week as volatility made a comeback.
Stablecoin Market Declines as High-Interest Rate Environment Slows Crypto Investment
However, according to data compiled by crypto research firm Delphi Digital, the total trading volumes across centralized and decentralized exchanges on the spot market are at a 2-year low.
A key indicator that analysts use to assess the health of market liquidity is the overall market cap of stablecoins. Since these crypto assets are pegged to the value of a fiat currency, most often the US dollar, they are less volatile than other cryptocurrencies and are widely used as on-and-off ramps by traders.
A recent report by decentralized finance (DeFi) total-value-locked (TVL) aggregator DefiLlama showed a decline in the total market capitalization of stablecoins over the past year, a figure that continues to shrink, further underscoring the ongoing liquidity issues in the crypto market.
A reason why the crypto market is not attracting fresh money could be due to the rising interest-rate environment. The peer-to-peer DeFi markets were a highly attractive option for investors during the COVID-19 pandemic era when interest rates were ultra-low and they were promised double or even triple-digit returns on investment. But now the sector is struggling because yields in traditional finance markets are more attractive and comparatively less risky than ones offered by crypto assets.
In a direct message to Bloomberg, Delphi Digital analyst Michael Rinko said the “fundamental reason” why liquidity continues to flow out of the crypto markets is because of high interest rates pushed by the US Federal Reserve. Going forward, how this liquidity shortage issue unfolds will be crucial for both retail and institutional crypto investors.