Large traders, often called "whales," are staying on the sidelines of the bitcoin (BTC) market despite a risk reset in traditional markets because thin liquidity is making it difficult to buy or sell the coin without affecting its price.
In signs of the increasing appetite for risk, stocks have gathered upside traction while the U.S. dollar has taken a beating on optimism that China’s reopening is gaining steam and the Federal Reserve may be close to winding up its liquidity-tightening cycle. In crypto, however, market depth – a measure of an asset's price resilience to large orders – is relatively low and discouraging activity.
"Aggregated 2% BTC market depth has dropped by almost half to around 8,000 BTC from 14,000 BTC at the end of October," analysts at Bitfinex, one of the top 10 centralized cryptocurrency exchanges by trading volume, wrote in a market report on Monday. "In other words, a large order of the same USD value or size placed today will have more than twice the impact on price in contrast to two months ago."
Crypto pundits typically keep track of the 2% market depth to assess liquidity conditions. The gauge represents a collection of the buy and sell orders within 2% of the mid-price – the average of the bid and the ask/offer prices being quoted at a given time.
"This is very discouraging for whales and larger trading firms actively trading crypto purely as an alternative publicly traded market," the analysts said.
The chart, sourced from Paris-based Kaiko Research, shows bitcoin's 2% market depth across major exchanges, including Bitfinex, crashed from around 11,000 BTC to about 6,000 BTC after Sam Bankman Fried's FTX exchange, formerly the world's third-largest, and its sister concern Alameda Research went bust in early November.
The depth has since remained below 10,000 BTC.
"Alameda Research was one of the largest market makers in crypto, providing billions of dollars' worth of liquidity for high-cap and low-cap tokens alike. We now know that the entire trading operation was funded by funds siphoned directly from FTX's clients," Kaiko's analysts said in their latest quarterly review, referring to the shallow market depth as the "Alameda gap in liquidity."
Other prominent market makers like Wintermute, Genesis Global Trading and Amber Group also had exposure to FTX and have been hurt by the exchange's bankruptcy.
The unwillingness of large investors to participate in the market due to poor liquidity is evident from dwindling daily trading volumes on centralized exchanges (CEX).
"While daily CEX volume has always fluctuated, the period between Nov. 25 to Dec. 25 had the lowest aggregated daily trading volume for a 30-day period (discounting the holiday period to avoid skewing the data)," analysts at Bitfinex said, citing data sourced from Kaiko.
BTC, the most liquid cryptocurrency
Bitcoin, the world's largest digital asset by market capitalization, remains the most liquid cryptocurrency. Whales, therefore, are likely to prefer it over other coins when they return to the crypto market.
The chart above from Kaiko Research compares the top 28 tokens by market value with their respective liquidity ranks, calculated using market depths, bid-ask spreads and trading volumes.