Bitcoin liquidity drops to 10-month low amid US bank run

Bitcoin (BTC) market liquidity had dropped to a 10-month low, despite a bullish quarter in terms of price gain. The liquidity dry-up is partly attributed to the bank run in the United States and the ongoing regulatory actions on crypto companies.

The liquidity situation in crypto is worsening after the banking fears this month

I dived into several liquidity metrics to give an update on all things crypto liquidity

First, $BTC liquidity has dropped to 10 month lows as market makers lose access to USD payment rails pic.twitter.com/RwcBEJ8y5Z

— Conor Ryder (@ConorRyder) March 23, 2023

BTC price has registered a 45% surge in 2023, making it one of the best-performing assets. The price gains come amid a looming financial crisis in the traditional financial market, where stocks and bonds have seen one of their worst years. The financial crisis triggered a bank run in the U.S., leading to several top banking giants collapsing.

The banking crisis also directly impacted the crypto ecosystem, where the collapse of crypto-friendly banks such as Silicon Valley and Signature cut the U.S. dollar payment rails, leading to a liquidity crisis, especially on U.S. exchanges.

Liquidity on US vs non-US exchanges. Source: Kaiko

The crunch in liquidity has also led to increased price volatility forcing traders to pay more fees in slippage. Slippage refers to the price difference between the expected price of a transaction and the price at which it’s fully executed. For a $100,000 sell order, the slippage for the BTC-USD pair on Coinbase has climbed by 2.5 times at the beginning of March. While during the same time frame, Binance’s BTC-USDT pair’s slippage barely moved.

USD vs USDT price slippage. Source: Kaiko

The liquidity crunch has also led to higher price volatility on U.S. exchanges, where the price discrepancy between BTC and USD pairs has increased drastically compared to non-U.S. exchanges. For example, the price of BTC on Binance.US is more volatile than the average price across ten exchanges.

Binance.US price difference vs 10 exchanges. Source: Kaiko

Conor Ryder, research head of on-chan data analytic firm Kaiko, in a Twitter thread explained the drastic impact of the liquidity crisis on traders and the market. He noted that stablecoins are replacing USD pairs and although it lessens the impact of US banking troubles, it has an adverse effect on the liquidity in the U.S. He added that it will indirectly harm investors there.

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