The cryptocurrency market is facing a growing liquidity crisis, as evidenced by the significant price slippages observed during recent sell-offs.
According to research by Kaiko, the ongoing issue of liquidity fragmentation across crypto exchanges has resulted in noticeable price discrepancies, particularly during periods of market stress.
Price Slippage
Liquidity fragmentation refers to the uneven distribution of liquidity across various exchanges. The recent market sell-off brought these issues to the forefront, with BTC prices on Binance.US being different from those on more liquid platforms.
Binance.US, a platform that has struggled with liquidity since the SEC lawsuit in June 2023, has seen its daily trade volume plummet from $400 million in early 2023 to just $20 million today.
The decline in liquidity has made the platform particularly vulnerable to price discrepancies during market events, such as the August 5th sell-off. During this event, less liquid altcoins experienced even greater price discrepancies, increasing the challenges faced by traders.
Price slippage, an indicator of liquidity, tends to rise during market sell-offs as liquidity dries up, complicating order execution at desired prices. Kaiko’s data reveals that on August 5th, price slippage increased across most exchanges, with certain platforms and trading pairs experiencing more severe spikes.
For instance, Zaif’s BTC-JPY pair faced the highest slippage due to the Bank of Japan’s rate hike, while KuCoin’s BTC-EUR pair saw discrepancies exceed 5%, highlighting the risks for traders in less liquid markets. Even typically liquid stablecoin pairs like BitMEX and Binance.US’s USDT and USDC pairs weren’t immune, with slippage rising by over three basis points.
The effects of liquidity events can vary not just between exchanges but also within trading pairs on the same platform. For example, Coinbase’s BTC-EUR pair is significantly less liquid than its BTC-USD counterpart, resulting in extreme volatility during periods of intense market activity.
This was evident in March when Coinbase’s BTC-EUR price diverged sharply from the broader market, leading to a significant drop in market depth.
Weekday Trading Surge
Another factor contributing to the liquidity crisis is the concentration of trading during weekdays, especially in BTC-USD markets. This trend, intensified by the launch of U.S. spot ETFs, increases weekend volatility. Unlike traditional markets, crypto markets operate 24/7, so Friday sell-offs can worsen weekend uncertainty, amplifying price impacts.
During the recent sell-off, bitcoin’s price moved 14% between Monday’s open and Friday’s close, mirroring movements seen in major sell-offs since 2020.
Despite the challenges of liquidity fragmentation, Kaiko notes that crypto platforms have significantly invested in infrastructure to handle higher trade volumes without outages, reducing arbitrage costs across exchanges.
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