Liquidity Reaches Critical Limits in Bitcoin and Ethereum! Is It a Volatility Precursor?

While the cryptocurrency market is going through turbulent days, liquidity conditions in the Bitcoin (BTC) and Ethereum (ETH) markets hit their lowest levels since the collapse of Terra in May 2022.

Liquidity Decreases in Bitcoin (BTC) and Ethereum (ETH)

Liquidity conditions in the Bitcoin (BTC) and Ethereum (ETH) markets continue to worsen. The current situation has become more worrying than three months ago. This makes investors think about sudden price fluctuations in the crypto market.

Liquidity refers to the market’s ability to absorb large buy and sell orders at stable prices. The metric commonly used to evaluate liquidity conditions is 2% of market depth.

It shows that for USDT pairs collected from 15 centralized exchanges, Bitcoin’s 2% market depth has dropped to 6,800 BTC, the lowest level since May 2022, surpassing the post-FTX low.

This is significantly lower than the October highs above 15,000 BTC.

Ethereum’s 2% market depth has slumped to 57,000 ETH, down more than half since October, led by Binance.”

“Weak liquidity means harder moves, especially in alternative cryptocurrencies,” said Matthew Dibb, chief investment officer at Astronaut Capital.

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The recent decrease in market depth took place amid diminished expectations of volatility in the BTC market. According to Griffin Ardern, an investor at crypto asset management firm Blofin, this type of situation often leads to a sudden burst of volatility.

According to data source CryptoCompare, the BTC Volatility Index (BVIN), which measures implied or expected volatility over the next 30 days, has dropped to 56.39, its lowest level since early 2021.

Liquidity in the crypto market began to wane in mid-November after Alameda Research and FTX went bankrupt in November. Alameda was one of the leading market makers providing billions of dollars of liquidity to small and large cap tokens.

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