Anika Begay
In a recent relationship, cryptocurrency research firm Kaiko has drawn the crypto community’s attention to Bitcoin’s liquidity crisis. The company added that this problem has been amplified by the launch of the United States Bitcoin Spot ETFs.
BTC Liquidity Fragmentation
Kaiko analysts noted in the report that liquidity fragmentation continues to persist for the flagship cryptocurrency, leading to price discrepancies through exchangesSimply put, liquidity fragmentation refers to when liquidity is unevenly distributed across these exchanges, leading to unstable prices, especially among the less liquid exchanges.
While this liquidity fragmentation has reduced for Bitcoin over time, the research firm noted that it was most evident during last week’s salewhich led to the flagship cryptocurrency falling below $50,000 for the first time since February. Kaiko gave the example of Binance US, whose Bitcoin price diverged from that of more liquid exchanges during the August 5 cryptocurrency crash.
Additionally, Kaiko noted that price 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 increased during the August 5 sell-off and was more pronounced on some exchanges and trading pairs.
The research firm revealed that the Japanese trading pair Zaif BTC-JPY had the highest slippage on the selling day, thanks to Bank of Japan rate increase. KuCoin’s BTC-EUR pair experienced a similar slide, approaching nearly 5.5% that day. Interestingly, Binance US and BitMEX’s US dollar stablecoin pairs, which are usually the most liquid on cryptocurrency exchanges, also saw significant increases of over 3%.
As Kaiko noted, this liquidity crisis not only varies between different exchanges, but can also vary between different trading pairs on the same exchange. For example, in March, the price of Coinbase’s BTC-EUR pair, which is less liquid than its BTC-USD pair, significantly deviated from the broader market following intense market activity.
How Spot Bitcoin ETFs Contributed to This Liquidity Crisis
Kaiko also said that liquidity in BTC-USD markets is increasingly concentrated during weekdays. This trend is said to have intensified due to US Bitcoin Spot ETFs, who now hold a significant amount of the circulating supply of Bitcoin. Unlike the cryptocurrency market, which operates 24/7, these Spot Bitcoin ETFs are still part of traditional markets, which close on weekends.
The research firm noted that this causes sales that begin on Fridays to worsen weekend uncertainty, thus amplifying the price impacts. In other words, prices tend to fall lower than expected during weekend sales due to lower liquidity.
While weekend volatility is said to have generally decreased since 2021, Kaiko added that it has increased trading concentration on weekdays has increased the “risk of sharp price swings over the weekend during market stress.” The research firm highlighted how Bitcoin price surged 14% between the U.S. market open on Monday and the close on Friday last week.
Featured image created with Dall.E, chart from Tradingview.com
