Liquidity crunch causes major price drops during cryptocurrency sales: Kaiko

The cryptocurrency market is facing a growing liquidity crunch, as evidenced by the significant price slides seen during recent sell-offs.

According to Kaiko’s research, the current problem of liquidity fragmentation among crypto exchanges has resulted in noticeable price discrepancies, especially during periods of market stress.

Price slippage

Liquidity fragmentation refers to the uneven distribution of liquidity between different exchanges. The recent market sell-off brought these issues to the fore, with BTC prices on Binance.US different from those on more liquid platforms.

Binance.US, a platform that has struggled with liquidity since the SEC’s demand in June 2023, has seen its daily trading volume drop from $400 million in early 2023 to just $20 million dollars today

The drop in 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 greater price discrepancies, adding to the challenges faced by traders.

Price slippage, an indicator of liquidity, tends to increase during market selloffs as liquidity dries up, making it difficult to execute orders at desired prices. Kaiko data reveals that on August 5, price slippage increased on most exchanges, with certain platforms and trading pairs experiencing more severe spikes.

For example, Zaif’s BTC-JPY pair faced the biggest 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 usually liquid stablecoin pairs like BitMEX and Binance.US’s USDT and USDC pairs were not immune, with slippage increasing by more than 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 diverged sharply from the broader market, leading to a significant drop in the depth of the market.

Commercial increase during the week

Another factor contributing to the liquidity crunch is the concentration of trading during weekdays, especially in the BTC-USD markets. This trend, intensified by the launch of US spot ETFs, adds to the volatility of the weekend. Unlike traditional markets, crypto markets operate 24/7, so Friday’s sell-off can worsen the weekend’s uncertainty, amplifying price impacts.

During the recent selloff, the price of bitcoin moved 14% between Monday’s open and Friday’s close, mirroring moves seen in major selloffs since 2020.

Despite the challenges of liquidity fragmentation, Kaiko notes that crypto platforms have invested significantly in infrastructure to handle higher trading volumes without disruption, reducing arbitrage costs on exchanges.

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