In the recent report, cryptocurrency research firm Kaiko brought Bitcoin’s liquidity crisis to the attention of the cryptocurrency community. The company added that the problem has worsened since the launch of the US Spot Bitcoin ETF.
BTC Liquidity Fragmentation
Kaiko analysts noted in the report that liquidity fragmentation still persists for the flagship cryptocurrency, leading to price discrepancies on the stock exchangesIn basic terms, liquidity fragmentation refers to a situation where liquidity is unevenly distributed across exchanges, leading to volatile prices, especially on less liquid exchanges.
While Bitcoin’s liquidity fragmentation has decreased over time, the research firm noted that it was very noticeable during sale last weekwhat led to the creation of the flagship cryptocurrency falls below $50,000 for the first time since February. Kaiko cited the example of Binance US, whose Bitcoin price deviated from prices on more liquid platforms during the Aug. 5 cryptocurrency crash.
Additionally, Kaiko noted that slippage, one of the best indicators of liquidity, tends to spike when liquidity dries up during market sell-offs like the one on August 5. As expected, bitcoin slippage spiked during the August 5 sell-off and was more noticeable on some exchanges and trading pairs.
The research firm revealed that the Japanese trading pair Zaif BTC-JPY saw the biggest slippage on the day of the sell-off, thanks to Bank of Japan interest rate hike. KuCoin’s BTC-EUR pair saw a similar decline, approaching almost 5.5% on the day. Interestingly, the Binance US and BitMEX dollar stablecoin pairs, which are typically the most liquid on cryptocurrency exchanges, also saw significant gains of over 3%.
As Kaiko noted, this liquidity crunch not only varies across exchanges, but can also vary across different trading pairs on the same exchange. For example, in March, Coinbase’s BTC-EUR pair, which is less liquid than its BTC-USD pair, significantly deviated from the broader market following increased market activity.
How Spot Bitcoin ETFs Contributed to This Liquidity Crisis
Kaiko also mentioned that liquidity in BTC-USD markets is becoming more concentrated on weekdays. This trend is said to have intensified due to US ETFs on Bitcoin Spot, which currently have a significant amount supply of Bitcoin in circulation. Unlike the cryptocurrency market which operates 24/7, these Spot Bitcoin ETFs are still established markets which close on weekends.
The research firm noted that this causes sales starting on Friday to exacerbate weekend uncertainty, thereby amplifying the impact of prices. In other words, prices tend to fall below expectations during weekend sales due to lower liquidity.
While weekend volatility is said to have generally declined since 2021, Kaiko added that it has increased concentration of trade on weekdays increased the “risk of sharp weekend price swings during market stress.” The research firm highlighted how Bitcoin saw a 14% price augment between the opening of the US market on Monday and the close on Friday last week.
Featured image created with Dall.E, chart from Tradingview.com
