In a recent report, crypto research firm Kaiko highlighted the Bitcoin liquidity crisis, emphasizing that it has worsened since the introduction of US Spot Bitcoin ETFs. The firm noted that liquidity fragmentation persists for Bitcoin, causing price discrepancies across exchanges. Liquidity fragmentation refers to uneven distribution of liquidity across exchanges, resulting in unstable prices, particularly on less liquid platforms.
During a recent sell-off, Bitcoin dropped below $50,000 for the first time since February, with Binance US experiencing price divergence from other more liquid platforms. Kaiko also observed an increase in price slippage during market sell-offs, indicating reduced liquidity. Japan’s Zaif BTC-JPY pair had the highest slippage during the sell-off day due to the Bank of Japan’s rate hike, while KuCoin’s BTC-EUR pair also suffered significant slippage.
The liquidity crisis varies not only across different exchanges but also among different trading pairs on the same exchange. For instance, Coinbase’s BTC-EUR pair diverged significantly from the broader market in March due to heightened market activity. Kaiko highlighted that price slippage tends to spike as liquidity dries up during market stress, affecting different exchanges and trading pairs.
Kaiko pointed out that liquidity in BTC-USD markets is increasingly concentrated during weekdays, a trend exacerbated by the US Spot Bitcoin ETFs holding a significant amount of Bitcoin’s circulating supply. These ETFs belong to traditional markets that close on weekends, leading to intensified price impacts during weekend sell-offs due to lower liquidity.
Weekend volatility, while declining since 2021, still poses a risk of sharp price swings during market stress due to increased weekday trading concentration. Bitcoin experienced a 14% price gain between the US market opening on Monday and its Friday close, indicating the impact of weekday trading concentration on price movements.
Overall, the Bitcoin liquidity crisis and fragmentation continue to pose challenges for the cryptocurrency market, impacting price stability and trading conditions across different exchanges and trading pairs. As the market evolves and new financial products like Spot Bitcoin ETFs enter the scene, addressing liquidity concerns and minimizing fragmentation will be crucial for ensuring a healthy and efficient market environment.
