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Ruth Kise 24 Apr 2024 ◦ 6 min read

What's going on with Bitcoin liquidity

What's going on with Bitcoin liquidity

Demand for Bitcoin is growing, while liquidity on the sales side is declining. This leads to the fact that the level of liquidity reserves reaches a historical minimum.

Understanding Bitcoin liquidity

Liquidity is essentially an assessment of the ability to buy or sell a particular asset at its current fair market value. For example, if you have Bitcoin and want to exchange it for dollars, then there should be enough demand on the buyers’ side so that you can make a sale at the current exchange rate.

If you want to sell Bitcoin in the amount equivalent to $1 million, and purchase orders close to the current market rate are available for only $500 thousand, then you will sell part of your Bitcoins at a lower price. In addition, your sales order will reduce the current price of Bitcoin, since there were not enough purchase orders at the sale price you requested. Such a phenomenon — the inability to buy or sell a specific asset at a market price in large volumes — is called slippage.

Cash is considered to be the most liquid asset in the world, since it can be used to purchase almost anything without this slippage. Although Bitcoin is a form of digital money, its liquidity is nowhere near that of fiat currencies.

From the point of view of the cryptocurrency market, there is no more liquid asset than Bitcoin. Nevertheless, the "whales" are still able to influence the Bitcoin exchange rate through large purchase and sales orders. This is due to a number of reasons, one of which is that there are dozens of different exchanges, and this creates price discrepancies in all markets. If all cryptocurrency transactions were conducted on a single centralized exchange, then the market would undoubtedly be more liquid.

A liquid asset is an asset that can be quickly turned into fiat money at a rate that is not much different from the price that can be obtained on the open market. Bitcoin can indeed be quickly exchanged, but when transferring really large amounts, some slippages may occur (impacting the price).

Factors affecting Bitcoin liquidity

  • Significant events. The larger the market, the more buyers and sellers there are, and the easier it is to find a buyer or seller for the asset. This is influenced by the popularity of the asset, while popularity, in turn, is caused by certain information events, marketing, as well as the presence of infrastructure. As a rule, news feeds are manipulative, and projects with real infrastructure and value work for a long time.
  • Number of trades occurring in the market. If the number of deals is larger, then it is easier for buyers and sellers to find each other and make a deal. Price fluctuations arouse interest in the asset, which in turn is reflected in the number of transactions.
  • Asset quality and acceptance. Bitcoin is the largest and most famous cryptocurrency that is accepted in shops, cafes, online stores, etc. Also, despite the volatility of the token, the number of cryptocurrency ATMs is growing, increasing the convenience of handling the asset, thereby increasing its volatility.
  • Market structure and balance between buyers and sellers. If the market structure is effective, then it will be easier for buyers and sellers to find each other and make deals. As you know, stock exchanges consist of limit orders, and crypto exchanges in every possible way contribute to the creation of liquidity — commissions for the limit orders disposals are often 2 times lower than those of market orders, and exchanges also cooperate with market makers who provide liquidity.
  • Regulatory environment. Cryptocurrency regulation has a dual impact on liquidity. On the one hand, a clear regulatory framework increases investor confidence by attracting new capital to the market and maintaining its stability. On the other hand, overly strict or ambiguous regulations can suppress and restrict the access of new participants, which negatively affects the overall liquidity. For now, Bitcoin's liquidity has been affected by the SEC's approval of ETFs. Their launch paved the way for major new institutional investors and reawakened their enthusiasm.

 Recent trends and challenges

According to a recent market survey from QCP Capital, the first signs indicate an influx of funds into Bitcoin spot exchange-traded funds (ETFs), in particular from Fidelity, which contributed to the growth of the BTC rate above $70,000, which we could observe on 8th of April.

According to cryptanalyst Ali Martinez, at that point it looked like Bitcoin was emerging from the ascending triangle model at shorter time intervals. This breakthrough raised the price of the asset to $71,800, but the support level of $70,400 broke.

Underlying data from the options market suggests a structurally bullish mood in anticipation of BTC halving. It is worth noting that there is a steady demand for call options on BTC with an exercise price of over $100,000 and valid until December.

Future outlook

In its latest research, network data provider CryptoQuant said that demand for Bitcoin has experienced a significant surge along with a noticeable decrease in liquidity on the sales side. The phenomenon has sent liquid stocks plummeting to unprecedented lows, signaling potential implications for the cryptocurrency's market dynamics.

The founder and CEO of the analytical platform CryptoQuant suggested: with the rate of capital inflow into spot Bitcoin ETFs, a liquidity crisis on the side of sellers will arise in six months. Ki Young Ju believes that Bitcoin's liquidity crisis will happen in September. But the next top of the cycle will surpass the most daring forecasts, the businessman believes. The expert is sure: the culmination will come as soon as 3 million Bitcoins are stored on the accumulation addresses.

In the first week of March alone, the net inflow of funds to the Bitcoin ETF exceeded 30,000 BTC. According to the CryptoQuant site, now the balance of accumulating addresses is 1.6 million coins. Thus, only 1.4 million BTC remain available for Bitcoin ETFs, after which the supply decline promised by Ki Yang Jun will begin amid continuing demand. These conditions undoubtedly symbolize the bullish nature of Bitcoin's future price.

Another interesting opinion is put forward by Arthur Hayes. According to the co-founder and former general director of the BitMEX crypto derivatives exchange, before and for some time after Bitcoin halving, we should expect a fairly strong market decline. In an article on his blog, Arthur Hayes writes that the cryptocurrency market will continue to grow in the medium term, but there may well be a noticeable market correction right before and after halving. He also noted that halving comes at a time when "dollar liquidity is lower than usual" and the US Fed may spring surprises.

“The narrative of the halving being positive for crypto prices is well entrenched. When most market participants agree on a certain outcome, the opposite usually occurs. That is why I believe Bitcoin and crypto prices in general will slump around the halving”, — Arthur Hayes. At the same time, the former CEO of BitMEX said that he himself decided to abandon trade until May, given the possibilities of the Fed's influence on the market due to the lack of liquidity of the dollar. He stressed that “If I miss a few percentage points of gains but definitely avoid losses for my portfolio ..., that is an acceptable outcome”.

Conclusion

Liquidity remains a crucial factor in Bitcoin's growth. Understanding the factors affecting liquidity and the ability to identify signs of its level helps to assess risks and identify investment opportunities. An incorrect assessment of this indicator can lead to significant losses in trade or investment. Different degrees of liquidity of an asset can be used to your advantage, depending on your initial data, such as the amount of deposit and temporary planning.

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