Despite an impressive 45% price surge in 2023, Bitcoin’s market liquidity has reached a 10-month low. This downturn is partially attributed to the ongoing bank run in the United States and increasing regulatory scrutiny targeting cryptocurrency companies.
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As one of the best-performing assets this year, Bitcoin‘s rise in value coincides with a looming financial crisis in traditional markets. Stocks and bonds are currently experiencing one of their worst years, with the crisis leading to the collapse of several banks.
This banking crisis has had a direct impact on the cryptocurrency ecosystem. The failure of crypto-friendly banks, such as Silicon Valley Bank and Signature Bank, has disrupted crucial US dollar payment channels for cryptocurrency transactions. As a result, a liquidity crisis has emerged, particularly on US-based exchanges.
The scarcity of liquidity has led to increased price volatility, causing traders to pay higher fees due to slippage.
Slippage refers to the discrepancy between the expected price of a transaction and the final price at which it is executed. For example, a $100,000 sell order on Coinbase saw the slippage for the BTC/USD pair increase by 2.5 times in early March. In contrast, the slippage for Binance‘s BTC/USDT pair remained relatively stable during the same period.
The liquidity crisis has also resulted in heightened price volatility on US exchanges, with a significant increase in price discrepancy between BTC and US dollar pairs compared to non-US exchanges. For instance, the price of BTC on Binance.US has exhibited greater volatility than the average price across ten other exchanges.
Conor Ryder, Research Head at on-chain data analytics firm Kaiko, has shed light on the severe consequences of the liquidity crisis on both traders and the overall market. He pointed out that stablecoins are increasingly replacing US dollar pairs, which, although mitigating the impact of the US banking crisis to some extent, has negatively affected liquidity within the United States. This, in turn, indirectly harms domestic investors.
As the crypto market grapples with this liquidity crisis, it highlights the need for solutions that address challenges in both the traditional financial market and the crypto ecosystem.
