In a recent report, crypto research firm Kaiko drew the crypto community’s attention to the Bitcoin liquidity crisis. The firm added that this issue has been amplified since the launch of the US Spot Bitcoin ETFs.
BTC’s Liquidity Fragmentation
Kaiko analysts noted in the report that liquidity fragmentation continues to persist for the flagship crypto, leading to price discrepancies across exchanges. Simply put, liquidity fragmentation refers to when liquidity is unevenly distributed across these exchanges, leading to unstable prices, especially among less liquid exchanges.
Although this liquidity fragmentation has reduced for Bitcoin over time, the research firm noted that it was very apparent during last week’s sell-off, which led to the flagship crypto dropping below $50,000 for the first time since February. Kaiko gave an example of Binance US, whose Bitcoin’s price diverged from those on more liquid platforms during the August 5 crypto crash.
Furthermore, Kaiko noted that price slippage, one of the best liquidity indicators, tends to spike as liquidity dries up during market sell-offs like the one on August 5. As expected, Bitcoin’s slippage increased during the August 5 sell-off and was more pronounced on some exchanges and trading pairs.
The research firm revealed that Japan’s Zaif BTC-JPY trading pair had the highest slippage on the sell-off day, thanks to the Bank of Japan’s rate hike. KuCoin’s BTC-EUR pair suffered a similar slippage, nearing almost 5.5% on that day. Interstingly, Binance US and BitMEX’s US-dollar stablecoin pairs, which are usually the most liquid on crypto exchanges, also experienced significant increases of over 3%.
As Kaiko noted, this liquidity crisis doesn’t only vary across different exchanges but can also vary among different trading pairs on the same exchange. For instance, in March, the price of Coinbase’s BTC-EUR pair, which is less liquid than its BTC-USD pair, diverged significantly from the broader market following heightened market activity.
How The Spot Bitcoin ETFs Have 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 thanks to the US Spot Bitcoin ETFs, which now hold a significant 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 sell-offs that start on Friday to worsen weekend uncertainty, thereby amplifying price impacts. In other words, prices tend to drop lower than expected during weekend sell-offs due to the lesser liquidity.
Although weekend volatility is said to have generally declined since 2021, Kaiko added that increased weekday trading concentration has heightened the “risk of sharp weekend price swings during market stress.” The research firm highlighted how Bitcoin enjoyed a 14% price gain between when the US market opened on Monday and its Friday close last week.
