In the midst of a series of banking storms, Bitcoin's bullish surge seems like an unexpected winner. However, investors gearing up to increase their bets face a critical challenge: Bitcoin's liquidity is drying up, which could trigger wild price swings at any moment.
Since the sudden collapse of Silicon Valley Bank grabbed market attention, Bitcoin, the leading cryptocurrency, has skyrocketed, briefly surpassing $28,000.
The bad news? Its liquidity has hit a 10-month low. Lower liquidity typically fuels greater volatility, especially in the crypto space—ironically, this may have contributed to Bitcoin's rally this month.
According to crypto data firm Kaiko, a key metric measuring Bitcoin's trading ease has plunged to its lowest level in 10 months, even lower than after the FTX crash last November. Kaiko reports that the market depth for two major trading pairs—Bitcoin-USD and Bitcoin-stablecoin—stands at 5,600 BTC (roughly $155 million).
Another red flag: slippage (the gap between quoted and executed prices) is rising. Kaiko research analyst Conor Ryder notes that slippage for a Bitcoin purchase with USD on Coinbase is now 2.5 times higher than early March.
Simulated sell orders of $100,000 show doubled slippage over the past month, meaning the actual average price per Bitcoin is lower than a month ago.
Kevin de Patoul, CEO of crypto market maker Keyrock, explains:
"As market makers, we strive to provide liquidity, but the current landscape is stuck in a vicious cycle. Multiple factors are at play, and improving liquidity will remain challenging—at least in the short term."
Patoul’s "multiple factors" refer to the collapses of Silvergate Bank and Signature Bank, whose real-time payment platforms (SEN and Signet) were vital for crypto liquidity. These services enabled instant settlements between exchanges and traders, facilitating rapid token swaps.
Despite market turbulence, cryptocurrencies have held their ground. CryptoCompare’s Bitcoin Volatility Index spiked to 96 last week—far above its usual range of 52–65—before settling around 68.
Another blow to Bitcoin’s liquidity came from Binance’s fee policy shift. The world’s most liquid crypto exchange recently ended zero-fee trading for nearly all Bitcoin pairs, triggering significant sell pressure.
Kaiko data reveals a 70% drop in Bitcoin-stablecoin liquidity and a 90% plunge in trading volume on Binance post-change.
The liquidity crisis traces back to FTX and Alameda Research’s collapse last year. As one of crypto’s largest liquidity providers, Alameda’s bankruptcy severed a key pipeline—now further strained by banking sector instability.
While new players may eventually fill the void, finding full replacements for Silvergate and Signature’s crypto tools could take years.
Analysts warn liquidity may keep deteriorating until then.
The shortage doesn’t just hurt market makers. Despite Bitcoin’s rebound after a prolonged slump, many investors remain cautious amid banking crises and central bank rate hikes.
Enigma Securities advisor Joseph Edwards observes:
"Even if some players stay active, most are watching from the sidelines—the banking storm isn’t over yet."
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FAQs
Q: Why does low liquidity cause Bitcoin price swings?
A: Thin trading volumes mean even small buy/sell orders can disproportionately move prices, creating spikes or drops.
Q: How long might Bitcoin’s liquidity crisis last?
A: With key banking partners gone, experts estimate months to years before new infrastructure fully replaces lost liquidity channels.
Q: Should investors avoid Bitcoin during liquidity droughts?
A: While risk rises, opportunities exist—experienced traders use volatility to their advantage with strategic entry/exit points.
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Q: What’s the #1 factor driving Bitcoin’s current rally?
A: Banking instability has revived Bitcoin’s appeal as a decentralized alternative, overshadowing short-term liquidity concerns.
Q: Can other cryptocurrencies face similar liquidity issues?
A: Yes—especially smaller altcoins. Bitcoin’s size gives it relative resilience, but market-wide liquidity crunches impact all crypto assets.
Q: How do traders adapt to high slippage?
A: Using limit orders, splitting large trades into smaller chunks, and avoiding peak volatility hours can minimize slippage effects.
Note: Trading involves risk. This content is for informational purposes only and does not constitute financial advice.