Liquidity Of Bitcoin Sinks As Tech Firms' Banks Collapse

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.

Photo Insert: Slippage, a liquidity measure describing how much prices change between the placement and execution of a trade, has also increased.

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) careened into mainstream markets, Reuters reported.

On the flip side, though, its liquidity is drying up. 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 US 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 collapse 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. Ryder said this was possibly one factor behind bitcoin's leap this month.

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