The Rebound of Crypto Market Liquidity: Bitcoin Rally and Improving Conditions, But Challenges Persist
The crypto market has witnessed a significant rebound in liquidity levels according to the latest findings from the reputable research firm Kaiko. The data gathered by this crypto intelligence company reveals that the infamous “Alameda Gap,” which was the result of substantial losses incurred by market makers during the collapse of FTX and Alameda Research in November 2022, has now returned to its pre-FTX average. This recovery follows a prolonged period of reduced liquidity that affected trading volumes and market stability.
The term “Alameda Gap” was first introduced by Kaiko in November 2022, emphasizing the notable decrease in liquidity caused by significant financial losses sustained during the collapse. The enduring presence of this gap for over a year underscored the substantial impact that major players had on crypto markets at that time.
One factor contributing to the recent liquidity recovery is the strong rally in Bitcoin prices. Kaiko’s research reveals a remarkable increase of 40% year-to-date in Bitcoin’s market depth, momentarily surpassing its pre-FTX average. This surge in market depth is in sync with the impressive 60% price gains Bitcoin has experienced since the beginning of the year, reaching an all-time high of $73,750 on March 14.
Moreover, Kaiko reported a noticeable decline in Bitcoin/USD spreads on significant U.S.-based exchanges, such as Coinbase, Kraken, and Bitstamp. This decline suggests that liquidity conditions are improving, making trading more economical for investors. The reduction in spreads can be attributed to structural factors as well as the overall enhancement of market liquidity.
Despite this positive development, potential challenges remain for the crypto market. Earlier in March 2023, concerns were raised regarding a possible “sell-side liquidity crisis” for Bitcoin if institutional exchange-traded fund (ETF) inflows continue at their previous pace.
However, daily ETF inflows have decreased substantially lately, dropping below $200 million from the earlier highs above $500 million. This decline comes after a record $1 billion daily inflow was reported when Bitcoin reached its all-time high.
These recent improvements in crypto market liquidity and the influence of Bitcoin’s rally are welcome news for traders and investors alike, but it is crucial to remain aware of potential challenges ahead. Stay tuned for further developments in the dynamic world of cryptocurrency markets.
