Banking Crisis Causes BTC Liquidity to Hit a 10-Month Low
While BTC’s price has been trending up since last week, the crisis that triggered the initial decline still poses concerns for the crypto market. According to analysts, the market has been exposed to low liquidity risks thanks to the sudden closure of Signatue’s Signet network and Silvergater’s SEN at the start of this month.
Liquidity is an important component in the crypto world as it enables the conversion of digital assets to fiat currencies.
Therefore an asset with poor liquidity causes market inefficiencies that lead to traders losing funds due to events such as slippage, larger spreads, and thin order books. In addition, it can trigger serious volatility, preventing investors from opening market positions.
Crypto Liquidity Crisis
According to the blockchain analysis firm Kaiko, the crypto market liquidity crisis began a day after Silvergate’s SEN network was shut down, recording a $200 million decline in 1% market depth.
This 1% market depth is determined by summing the asks and bids within 1% of the mid-price for the leading ten cryptocurrencies.
The volatility in the market is reduced in case the market depth is adequate and order books are congested around the market price.
Kaiko analyst Conor Ryder says the market depth for the top two cryptocurrencies, Bitcoin and Ethereum, has dropped by 16.13% and 17.67%, respectively, since the start of March. Ryder reveals that the current Bitcoin liquidity level is the lowest in ten months.
Effects of BTC’s Low Liquidity
The BTC’s low liquidity has caused inefficiencies like larger spreads and high slippage. In Coinbase, for example, the exchange’s BTC-USD pair today has a higher slippage (three times) than on March 1.
In simple terms, slippage means the difference between the price when one places an order and the price at which that order is executed. In cases of low liquidity, that difference can be significantly huge.
Moreover, The BTC-USDT pair on Binance, which many consider highly liquid, has also dealt a blow after the leading crypto exchange halted its zero-fee program. As a result, the liquidity of the pair declined by 75% as market makers went looking for greener pastures.
