(Bloomberg) — A dearth of liquidity in the digital-asset market continues to roil Bitcoin, even with the first US exchange-traded funds to hold the cryptocurrency logging billions of dollars in trading volume since their debut.
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The ability to easily or quickly buy and sell the digital currency hasn’t improved since the 10 funds began trading Jan. 11, traders say. Liquidity is especially important in a relatively new market such as crypto, where a single large trade can have an outsized impact on an asset price, raising the risk of manipulation.
“The emergence of spot Bitcoin ETFs, while very positive for overall market sentiment, do not have any noticeable impact on overall market liquidity,” said Jordi Alexander, the Singapore-based founder of digital-asset trading firm Selini Capital.
Bitcoin has whipsawed investors since the ETF launch, fluctuating as much as 12% in the first 24 hours or so around the initial trading of the funds. One reason behind the wild swings may be that liquidity is still being hampered by the market blowups of 2022. The void left from the demise of Sam Bankman-Fried’s crypto exchange FTX and its sister firm Alameda Research, which was one of the sector’s biggest market makers, still hasn’t been filled.
Crypto data firm Kaiko measures liquidity by using a metric called market depth, which it calculates the quantity of bids and asks that are within 1% of the mid-price for Bitcoin’s trading pairs on exchanges. The higher the measure is, the more liquid the market, and vice versa. Without deep liquidity, the crypto market will likely continue to face more volatility, Kaiko analysts say.
“The weaker a market’s depth, the easier it is for large market orders to move the price, which negatively impacts traders,” wrote Clara Medalie, head of growth at Kaiko, in a note.
Kaiko dubbed the decline in liquidity the “Alameda Gap” in 2022. In addition to Alameda, other top market-making firms such as Jane Street Group and Jump Crypto have pulled back from trading crypto, as Bloomberg reported last year.
“While liquidity has been better in the last three months, we don’t expect a return to the deep books of last cycle in altcoins, as that was primarily driven by loss-making desks at Alameda and other centralized exchange trading desks trying to boost attention and volumes,” Alexander said.
Despite the billions of dollars worth of Bitcoin that was purchased and sold for the ETFs, Alexander said that most of that activity was happening through large over-the-counter desks, which doesn’t help bolster overall liquidity or market depth.
‘With large market makers having left the space over 2022-2023, a number of smaller shops have stepped in to take their place,” said Darius Tabatabai, co-founder of decentralized exchange Vertex Protocol. “That has meant that liquidity during low volatility regimes has once again improved, the absence of those with larger balance sheets is still felt when volatility hits and can lead to large, often violent liquidations as few market makers are happy to take large risk onto their books.”
The ETFs have seen more than $20 billion in trading volume since they were launched, making them among the most successful introductions of exchange-traded products, according to data compiled by Bloomberg Intelligence. Still, the trading volume is in the equity shares and not all the transactions result in the creation or redemption of Bitcoin. To complicate the situation, the conversion of the Grayscale Bitcoin Trust to an ETF has led to around $4 billion in redemptions from the former trust. GBTC shares often traded at a discount to the value of the underlying assets.
“People probably got a little overzealous front running the ETF flows and there was some portion of GBTC holders that were not hedged, that were waiting for the discount to go away to sell it,” Spencer Hallarn, global head of over-the-counter trading at crypto investment firm GSR.
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