Bitcoin Liquidity Hits 10-month Low Amid US Bank Run
Although the price of Bitcoin has been on a bullish trend this past quarter, the market’s liquidity has hit a 10-month low. This drop in liquidity is partially due to the increased regulatory scrutiny against crypto firms and the banking crisis in the US.
Regulations And Bank Runs Affect Bitcoin’s Liquidity
Meanwhile, Bitcoin’s price has experienced an impressive 45% surge in 2023, cementing its position as one of the highest-performing assets of the year. This surge in value coincides with a turbulent year for traditional financial markets, which have seen bonds and stocks struggle amid a looming financial crisis.
Additionally, this crisis triggered a bank crisis in the US, resulting in the collapse of several major banking institutions. The crisis in the banking sector directly affected the cryptocurrency ecosystem.
Furthermore, the fall of crypto-friendly banks such as Signature and Silicon Valley disrupted the USD payment infrastructure. This, in turn, caused a severe liquidity crisis in US-based crypto exchanges.
As a result of the liquidity crunch, traders were forced to contend with increased price volatility, which, in turn, led to higher slippage fees. Slippage is the difference between a transaction’s expected price and the price of its execution.
At the start of March, the slippage for the BTC/USD pair on Coinbase surged by 2.5 times for a $100K sell order. Meanwhile, the slippage for Binance’s BTC/USDT pair remained relatively stable during that same period.
The liquidity crunch has given rise to greater price volatility on US exchanges, causing a significant increase in the price difference between BTC and USD pairs compared to exchanges outside the US. For instance, the BTC’s price on Binance.US is considerably more unstable than the mean price observed across ten other exchanges.
Stablecoins: An Alternative To The USD?
In a Twitter thread, Conor Ryder, a crypto research analyst at Kaiko, an on-chain data analytics firm, highlighted the significant impact of the liquidity crisis on traders and the market. He explained that stablecoins are increasingly replacing USD pairs, which reduces the effects of banking issues in the US.
However, this shift hurts liquidity within the country, and as a result, it may indirectly harm investors. Inadequate liquidity in an asset can result in market inefficiencies that cause traders to incur losses due to thin order books, slippage, and wider spreads.
Furthermore, it can lead to considerable volatility and discourage sophisticated investors from engaging in trades. In a recent interview, Clara Medalie, Kaiko’s head of research, cautioned that the current situation is precarious and could result in significant price volatility in upward and downward directions.
Medalie says traders rely heavily on USD networks to settle daily trades. While stablecoins are not considered the most optimal option for risk management when settling at the end of a day or week, they become a viable alternative if banks are closed or unable to process transactions.
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