In a recent report, crypto research firm Kaiko drew the crypto community’s attention to Bitcoin’s liquidity crisis. The company added that this problem has been exacerbated since the launch of the U.S. Spot Bitcoin ETFs.
BTC’s Liquidity Fragmentation
Kaiko analysts noted in the report that liquidity fragmentation persists for the flagship crypto, leading to price divergence across stock exchangesSimply put, liquidity fragmentation refers to a situation where liquidity is unevenly distributed across these exchanges, leading to unstable prices, especially on less liquid exchanges.
While this liquidity fragmentation for Bitcoin has decreased over time, the research firm noted that it has been a feature of the last week’s salewhich led to the flagship crypto fall below $50,000 for the first time since February. Kaiko gave the example of Binance US, whose Bitcoin price diverged from more liquid platforms during the August 5 crypto crash.
Additionally, Kaiko noted that price drops, one of the best liquidity indicators, tend to spike when liquidity dries up during market sell-offs like the one on August 5. As expected, Bitcoin’s drop intensified during the August 5 sell-off and was more pronounced on some exchanges and trading pairs.
The research firm revealed that Japanese trading pair Zaif BTC-JPY had the biggest slippage on the selling day, thanks to the Bank of Japan interest rate hike. KuCoin’s BTC-EUR pair suffered a similar slippage, approaching 5.5% on the day. Interestingly, Binance US and BitMEX’s US-dollar stablecoin pairs, which are typically the most liquid on crypto exchanges, also saw significant increases of over 3%.
As Kaiko noted, this liquidity crunch 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, deviated significantly from the broader market following increased market activity.
How the Spot Bitcoin ETFs Contributed to This Liquidity Crisis
Kaiko also mentioned that liquidity in the BTC-USD markets is increasingly concentrated during weekdays. This trend is said to have intensified due to the US Spot Bitcoin ETFs, who now a considerable amount of Bitcoin’s circulating supply. Unlike the crypto market, which trades 24/7, these Spot Bitcoin ETFs still belong to the traditional markets, which close on weekends.
The research firm noted that this causes sales that start on Friday to exacerbate uncertainty over the weekend, amplifying the price impact. 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 volatility has increased concentration of trading on weekdays has increased the “risk of sharp price swings over the weekend during market stress.” The research firm highlighted how Bitcoin posted a 14% price increase between the US market open on Monday and the close on Friday last week.
Main image created with Dall.E, chart from Tradingview.com