The cryptocurrency market is facing a growing liquidity crisis, as evidenced by the significant price drops seen during recent sell-offs.
According to research by Kaiko, the current issue of liquidity fragmentation on cryptocurrency exchanges has led to notable price discrepancies, particularly during periods of market stress.
Price slippage
Liquidity fragmentation refers to the uneven distribution of liquidity across different exchanges. The recent sell-off in the market brought These questions come to the fore as BTC prices on Binance.US are 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 trading volume drop from $400 million in early 2023 to just $20 million today.
He decline The lack of liquidity has made the platform particularly vulnerable to price discrepancies during market events, such as the August 5 sell-off. During this event, less liquid altcoins experienced even larger price discrepancies, increasing the challenges faced by traders.
Price slippage, an indicator of liquidity, tends to increase during market sell-offs as liquidity dries up, making it difficult to execute orders at desired prices. Data from Kaiko reveals that on August 5, price slippage increased on most exchanges, with certain platforms and trading pairs experiencing more severe spikes.
For instance, Zaif’s BTC-JPY pair faced the largest slippage due to the Bank of Japan’s rate hike, while KuCoin’s BTC-EUR pair saw discrepancies of over 5%, highlighting the risks for traders in less liquid markets. Even typically liquid stablecoin pairs like BitMEX and Binance.US’ USDT and USDC pairs were not immune, with slippage increasing by over three basis points.
The effects of liquidity events can vary not only 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 deviated markedly from the broader market, leading to a significant drop in market depth.
Increase in trade during the week
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 US spot ETFs, increases volatility over the weekend. Unlike traditional markets, cryptocurrency markets operate 24/7, so Friday liquidations can worsen weekend uncertainty, amplifying price impacts.
During the recent sell-off, the price of Bitcoin excited 14% between Monday’s opening and Friday’s closing, reflecting the movements observed in major settlements since 2020.
Despite the challenges posed by liquidity fragmentation, Kaiko notes that cryptocurrency platforms have invested significantly in infrastructure to handle higher trading volumes without disruption, reducing arbitrage costs on exchanges.
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