Liquidity Struggles Plague Crypto Markets Amid Banking Upheaval

  • Strained liquidity in U.S. exchanges is evident through market depth, spreads, slippage, and trading volumes.
  • A new payment network could restore liquidity, reduce volatility, and attract new investors to crypto.

Liquidity concerns in the cryptocurrency markets have been growing, and recent collapses in the banking sector have only served to exacerbate an already precarious situation. Analyst Conor Ryder from Kaiko Research addressed this issue in a recent blog post, examining market depth, spreads, slippage, and volumes as key indicators of liquidity in the crypto markets.

According to Ryder’s analysis, the closure of the SEN network and Silvergate’s Signet payment network — both crucial for market makers in the space — has further strained liquidity. His examination of market depth shows that neither Bitcoin nor Ethereum has seen improvements in native units, with liquidity levels at their lowest in 10 months.

Spreads have also become more volatile due to banking issues, particularly affecting USD-linked exchanges and pairs. Ryder notes that the longer it takes for a viable alternative to SEN or Signet to emerge, the more volatile these spreads and depth will become. He also highlights the impact of Binance’s decision to halt its zero-fee program for Bitcoin trading pairs, which caused a 70% drop in liquidity for the BTC-USDT pair on the exchange.

In terms of slippage, Ryder’s analysis reveals that liquidity issues in the U.S. have led to increased slippage on Coinbase compared to Binance, with BTC-USD pair slippage on Coinbase two and a half times higher than at the start of the month. On the subject of trading volumes, Binance continues to dominate the market, while U.S. exchanges have struggled to gain share.

Ryder further noted the shift in volume share per exchange, pointing out that very little volume actually flows into U.S. exchanges and, in turn, USD pairs. The split of stablecoin vs. USD volumes reinforces this conclusion, with stablecoins rising from a 77% share of volumes to 95% in just over a year.

Ryder concludes that investors are gradually moving away from USD pairs in favor of stablecoins, resulting in a shift in liquidity dynamics. The development of a new payment network similar to SEN or Signet could potentially restore liquidity and reduce market volatility, making the cryptocurrency asset class more attractive to new investors.

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