Bitrabo Editorial
A recent report from crypto research firm Kaiko highlighted the liquidity crisis affecting Bitcoin, particularly following the launch of US Spot Bitcoin ETFs.
Liquidity Fragmentation for Bitcoin
Kaiko’s analysis revealed ongoing liquidity fragmentation for Bitcoin, leading to price discrepancies among different exchanges. This uneven distribution of liquidity can result in unstable prices, especially on less liquid platforms.
Although liquidity fragmentation has decreased over time for Bitcoin, it was noticeably evident during a recent sell-off, causing Bitcoin to fall below $50,000 for the first time since February. Kaiko cited Binance US as an example, where Bitcoin’s price deviated from more liquid platforms during the August 5 market downturn.
Moreover, Kaiko noted that price slippage, a key liquidity indicator, tends to surge during market sell-offs due to drying liquidity. Bitcoin experienced increased slippage during the August 5 sell-off, particularly on certain exchanges and trading pairs.
According to Kaiko, Japan’s Zaif BTC-JPY pair showed the highest slippage on the sell-off day, influenced by the Bank of Japan’s rate hike. KuCoin’s BTC-EUR pair also faced significant slippage near 5.5%. Even usually liquid pairs like Binance US and BitMEX’s US-dollar pairs saw slippage spikes exceeding 3%.
The liquidity crisis not only varies across exchanges but also within different trading pairs on the same exchange, as evident in the divergence between Coinbase’s BTC-EUR and BTC-USD pairs during heightened market activity in March.
Spot Bitcoin ETFs Impact on Liquidity Crisis
Kaiko pointed out that liquidity in BTC-USD markets has become more concentrated on weekdays, notably due to the influence of US Spot Bitcoin ETFs, which hold a significant portion of Bitcoin’s circulating supply. Unlike the 24/7 crypto market, these ETFs belong to traditional markets that close on weekends.
This setup exacerbates weekend sell-off uncertainties, leading to intensified price impacts as liquidity diminishes. Consequently, weekend price drops tend to be more severe due to reduced liquidity.
While weekend volatility has generally decreased since 2021, Kaiko highlighted the heightened risk of sharp weekend price swings during market stress caused by increased weekday trading concentration. The firm noted a 14% price surge in Bitcoin from the US market opening on Monday to its Friday close last week.