Stocks have gained upward momentum due to confidence that China’s reopening its economy and that the Federal Reserve may be near to ending its quantitative tightening, indicating a growing risk appetite. On the other hand, the U.S. dollar has been hit hard as its rivals dry to dump its status as a reserve.
Market depth, a metric of an asset’s price resilience to large orders, is relatively low in cryptocurrency, which discourages participation. Despite a risk reset in traditional markets, crypto whales, or huge traders, are avoiding the bitcoin (BTC) market due to the difficulty of conducting transactions without affecting the cryptocurrency’s price.
According to analysts, the combined 2% BTC market depth has decreased by about 50%, from 14,000 BTC at the end of October to roughly 8,000 BTC. So it isn’t very reassuring for whales and larger trading organizations to use cryptocurrency only as an alternative publicly traded market.
To gauge liquidity levels, cryptocurrency experts frequently monitor the 2% market depth. The indicator is an aggregate of buy and sell orders within 2% of the mid-price, which is the average of the bid and buy/sell prices quoted at a certain moment.
In early November, Sam Bankman Fried’s FTX exchange, formerly the third-largest in the world, and its sister company Alameda Research went out of business. As shown in the chart from Paris-based Kaiko Research, bitcoin’s 2% market depth across major exchanges dropped from about 11,000 BTC to about 6,000 BTC. Since then, the depth has stayed below 10,000 BTC.
According to Kaiko’s experts, Alameda Research was one of the biggest market makers in the cryptocurrency industry, offering billions of dollars worth of liquidity for both high-cap and low-cap tokens. However, as a result of what is now known as the “Alameda gap in liquidity,” FTX’s entire trading business was fuelled by money stolen straight from its customers.
Other well-known market makers with exposure to FTX, including Wintermute, Genesis, and Amber Group, have suffered due to the exchange’s insolvency. In addition, the declining daily trading volumes on centralized exchanges (CEXs) show that whales are not interested in trading because of the lack of liquidity.
While daily CEX volume has always fluctuated, according to analysts at a cryptocurrency firm, the 30-day period from November 25 to December 25 saw the lowest average daily trading volume (the data excluded the holidays in between to avoid skewness).