Bitcoin liquidity dries up as crypto ‘tourists’ back away from industry upset

(Bloomberg) — By almost any measure, bitcoin liquidity remains low despite the cryptocurrency’s remarkable growth this year.

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Investors are paying more for trades because of slippage, or the difference between the expected price of a transaction and the price at which it is fully executed, a sign of deteriorating liquidity, according to Kaiko’s Connor Ryder. The higher the trading difficulty, the more investors are exposed to potential price fluctuations.

This can happen due to a change in the bid-ask spread between the time the trade is placed and executed, or when there is insufficient order book depth to support large orders.

While bitcoin’s recovery this year made it the best-performing asset in the first quarter, a widening regulatory crackdown in the US and the collapse of several neighboring crypto banks have dampened some investors’ enthusiasm.

“This is more indicative of institutional reluctance to offer liquidity in the space,” said Ryder, a research analyst at the Paris-based firm. Many crypto firms do not want to be caught in the middle of a battle between US regulators and exchanges.”

Although prices recovered in early 2023, trading volumes and liquidity in the crypto market declined when measured over the past year amid an overall price decline that saw bitcoin fall by about 39% — to about $28,000 — and some other coins even more so. Investors pulled back during this period as a series of scandals scared them off. Analysts are now particularly keen on how smaller retail investors might behave, as they were an integral part of the system, helping to push prices higher during the early pandemic boom.

“Tourists have definitely disappeared,” said Mark Connors, head of research at digital asset management firm 3iQ. “If you’re in it, you have to understand that the volatility is there, you don’t know where it’s going day-to-day, but you understand the trajectory, the adoption, etc.”

Spot volumes on some of the most popular crypto exchanges also help tell this story. Binance, the largest trading platform, at the end of March saw normalized 24-hour trading volumes of more than $6 billion, with monthly visits of around 65 million. By comparison, Coinbase, the second largest, saw trading volumes of about $1.3 billion, with roughly 33 million monthly visits, according to data from CoinGecko and numbers compiled by the company.

“Unstable Market”

Bitcoin trading volumes have collapsed “which inevitably leads to a more volatile market,” said Fiona Cincotta, senior financial markets analyst at City Index. “The sharp drop in volumes means it’s easier for large orders to change BTC prices. So stay calm, there could be more wild changes.”

She added: “Falling volumes point to a waning of appetite for Bitcoin at its recent highs amid easing concerns around the banking sector and as crypto regulation comes under the spotlight.”

Read more: Crypto’s most powerful man has more than ‘FUD’ to worry about now

News has emerged in recent days that the US Commodity Futures Trading Commission is suing founder Changpeng Zhao and his cryptocurrency exchange Binance for alleged violations of derivatives regulations. Binance said it disagreed with the characterization of many of the issues raised in the complaint.

“It remains to be seen how the case will affect Binance’s operations,” said Strahinja Savic, head of data and analytics at FRNT Financial. “In this context, the status quo of liquidity in the crypto space is not affected by the fees.”

Bitcoin rose as much as 1.5% on Monday and was trading at around $28,249 as of 7:15 am. in New York. Smaller tokens like Ether, Solana and Avalanche were mixed.

(Updates with market prices in last paragraph.)

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