Bitcoin (BTC) has seen a significant price surge of 45% in 2023, making it one of the best-performing assets in recent times. However, despite the bullish quarter in terms of price gain, BTC’s liquidity has dropped to a 10-month low. The liquidity dry-up is partly attributed to the ongoing financial crisis in the traditional financial market and regulatory actions against crypto companies.
The current financial crisis has caused several banks to collapse, which has directly impacted the crypto ecosystem. In particular, the collapse of crypto-friendly banks such as Silicon Valley Bank and Signature Bank has removed crucial U.S. dollar payment rails for crypto, leading to a liquidity crisis, especially on U.S. exchanges. This, in turn, has led to increased price volatility, forcing traders to pay more fees in slippage.
Slippage refers to the price difference between the expected price of a transaction and the price at which it is fully executed. For instance, for a $100,000 sell order, the slippage for the BTC/USD pair on Coinbase climbed by 2.5 times at the beginning of March. During the same time frame, Binance’s BTC/USDT pair’s slippage barely moved.
The liquidity crunch has also led to higher price volatility on U.S. exchanges, where the price discrepancy between BTC and U.S. dollar pairs has increased drastically compared with non-U.S. exchanges. For example, the price of BTC on Binance.US is more volatile than the average price across 10 other exchanges.
Conor Ryder, research head of on-chain data analytics firm Kaiko, explained the drastic impact of the liquidity crisis on traders and the market. He noted that stablecoins are replacing U.S. dollar pairs, and although it lessens the impact of U.S. banking troubles, it has an adverse effect on liquidity in the United States. He added that it would indirectly harm investors there.
Despite the regulatory actions taken against crypto companies, the price of Bitcoin has remained relatively strong, outperforming traditional assets such as stocks and bonds, which have seen one of their worst years. However, the liquidity crisis has undoubtedly impacted the market, and it remains to be seen how it will evolve in the coming months.
In conclusion, Bitcoin’s liquidity drop despite its price surge is a concerning development for traders and investors alike. The ongoing financial crisis and regulatory actions against crypto companies have led to a liquidity crunch, causing increased price volatility and higher fees for traders. As the market evolves, it will be interesting to see how BTC’s liquidity and price behave in response to the changing market conditions.