Bullish bitcoin has been a surprise winner of the banking blowout. Yet investors aiming to amp up their bets face an ominous obstacle: a lack of liquidity that could trigger wild price swings.
The price of the No.1 cryptocurrency has jumped 40% to around $27,700 since March 10, when the failure of Silicon Valley Bank (SVB) careered into mainstream markets.
Bitcoin's market depth indicates the asset is at its lowest level of liquidity in 10 months, even lower than in the aftermath of the FTX collapse in November, according to data provider Kaiko. The market depth for the two leading trading pairs - bitcoin-dollar and bitcoin-tether - stands at 5,600 bitcoin, the equivalent of about $155 million, Kaiko said.
"As a market maker we try to provide liquidity where we can but we're facing a difficult situation," said Kevin de Patoul, CEO of Keyrock. "There is a big network effect here. In the short term at least, liquidity will remain a challenge."
Slippage, a liquidity measure describing how much prices change between the placement and execution of a trade, has also increased. Slippage for buying bitcoin with U.S. dollars on the Coinbase exchange is 2.5 times higher than it was at the start of March, said Conor Ryder, research analyst at Kaiko.
The slippage for a simulated $100,000 sell order has doubled in the past month, meaning the average price you get for each bitcoin is worse than a month ago, Kaiko said.
The network effect de Patoul referred to was the collapses of Silvergate Capital and Signature Bank, whose networks had long been used by market makers - which expand liquidity by rapidly buying and selling tokens - to transact with exchanges.
Lower liquidity typically translates to more volatile markets, especially in crypto. Kaiko's Ryder said this was possibly one factor behind bitcoin's leap this month.
CryptoCompare's Bitcoin Volatility Index spiked to 96 last week, way higher than the range of 52 to 65 it saw last month as the cryptocurrency held its footing despite broader market turmoil. The index is currently hovering around 68.
