“Spot cryptocurrency trading volume has fallen over the past 18 months as the market struggles to find its role in the current high interest rate environment. Bank and of Signature Bank (OTC:), market makers may not be able to operate as efficiently as before,” warns Mads Eberhardt, cryptocurrency analyst at Saxo Bank.
“Since the end of the cryptocurrency market’s trading period in 2021, liquidity has dried up. As evidence of this, spot trading volumes on Coinbase (NASDAQ:) and Kraken, the two major trading ramps access to fiat currency for most of the world has plummeted over the past two and a half years. Last May, the combined trading volume of these two exchanges was the lowest at some $39 billion. Two years earlier, that figure was $369 billion,” adds Eberhardt.
Generally speaking, according to Eberhardt, less volume equals less liquidity. “Between the start of the year and mid-June, Coinbase’s market depth decreased by around 25%, while Kraken’s liquidity improved slightly, according to cryptocurrency platform Kaiko. Lower liquidity means there are fewer participants in the market and it takes less volume to move the needle in terms of price, especially if larger amounts are being traded,” says Eberhardt.
Lack of liquidity when the market needs it most
“There have also been sharp drops in liquidity due to contagion effects. This is what happened, for example, when FTX and its hedge fund Alameda Research crashed. During such contagion , the market needs liquidity more than ever, so sudden shortages of liquidity in these cases have a very negative impact on the market, as they fuel excessive volatility and an inefficient market when it is already in state of alert,” says Eberhardt.
The latest cryptocurrency contagion happened in March this year, when Silvergate Bank, Signature Bank and SVB (OTC:), all related in some way to cryptocurrencies, went out of business. . The cryptocurrency market has been somewhat quiet since then, although further contagion cannot be ruled out. If so, market participants should recognize that liquidity could plummet immediately and act accordingly, as a fall in liquidity similar to the collapse of FTX is not unlikely, Eberhardt reminds.
“This is a particularly likely outcome considering that market maker market conditions are worse than they were at the end of 2022 due to the absence of Silvergate and Signature. , through which market makers could instantly deposit and withdraw dollars and euros to and from exchange accounts in order to benefit from arbitrage and thereby maintain an efficient market.Alternatives to Silvergate and Signature have emerged in the latter months, but they are nowhere near as popular as the other two banks were. This means that current liquidity is even more threatened by contagion and volatility”, concludes the Saxo Bank analyst.