Bitcoin has been experiencing a surge in price, jumping 40% to approximately $27,700 since March 10, following the failure of Silicon Valley Bank, which has triggered a banking blowout that has affected mainstream markets. However, investors aiming to capitalize on this upward trend may face an ominous obstacle: the lack of liquidity in the market, which could potentially trigger wild price swings.
According to data provider Kaiko, Bitcoin’s market depth, a measure of liquidity, is currently at its lowest level in the past 10 months, indicating that liquidity is drying up. The market depth for the two leading trading pairs, Bitcoin-dollar and Bitcoin-tether, is reportedly standing at 5,600 Bitcoin, the equivalent of around $155 million. This represents a significant challenge for market makers in providing liquidity, especially given the network effect, which is causing liquidity to remain a challenge in the short term.
Moreover, slippage, a measure of liquidity that describes how much prices change between the placement and execution of a trade, has also increased. For instance, the slippage for buying Bitcoin with U.S. dollars on the Coinbase exchange is currently 2.5 times higher than it was at the start of March. Furthermore, the slippage for a simulated $100,000 sell order has doubled in the past month, meaning the average price one gets for each Bitcoin is worse than it was a month ago.
The network effect, which refers to the collapses of Silvergate Capital and Signature Bank, is another major factor behind the lack of liquidity. These banks’ networks were long used by market makers to transact with exchanges, so their collapses have led to a significant reduction in liquidity, making it more difficult for investors to trade Bitcoin.
Lower liquidity typically translates into more volatile markets, particularly in the case of cryptocurrencies. Kaiko’s research analyst, Conor Ryder, suggests that this may be one factor behind Bitcoin’s leap in price this month. However, it also indicates that the lack of liquidity in the market poses a significant challenge for investors who are looking to capitalize on Bitcoin’s recent upward trend.
Overall, the lack of liquidity in the Bitcoin market is a major concern for investors, as it may lead to significant price swings that could potentially wipe out profits. Consequently, it is important for investors to exercise caution when trading Bitcoin and to carefully consider the risks involved before making any investment decisions.
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