Liquidity King: What the Crypto Market Needs to Overcome Current Dislocation

April 6, 2023

By Murtuza Merchant

The cryptocurrency market has yet to fully recover from the dip it experienced earlier this year, even though Bitcoin’s price has been on the rise recently, crossing the 29,000 mark. 

The root cause of the dip in March continues to pose concerns for the market, particularly concerning low liquidity risk.

One of the major factors contributing to this issue is the closure of Silvergate’s SEN network and Signature’s Signet network, which exposed the crypto market to low liquidity risk. As liquidity is a critical component in the trading world, the crypto market must find ways to address this issue.

According to trading experts, low liquidity in the market can result in various problems, such as thin order books, slippage, and larger spreads, which can lead to increased volatility and traders losing money. Additionally, a lack of liquidity can also discourage sophisticated investors from participating in trades.

To address the issue, experts believe that the market needs to find alternative sources of liquidity, such as promoting the use of stablecoins and encouraging more institutional investors to enter the market. Crypto exchanges also play a significant role in improving market liquidity by providing a platform for buyers and sellers to trade crypto assets and introducing measures such as market-making programs.

Experts also discussed the impact of the US banking network collapse on the crypto market and how it poses a significant risk to its health, the role of liquidity in facilitating conversion between assets and fiat currency, and the impact of poor liquidity on market inefficiencies.

Ahmed Ismail, CEO and Founder of FLUID, says that the crisis has highlighted a breakdown in trust of liquidity risk management controls in the face of misguided US interest rate policy. He adds that the crisis has pushed crypto-fiat businesses away from the US and towards Asian markets such as the UAE and Singapore.

Bitfinex Analysts state that the collapse of a few regional US banks has posed a risk to the crypto market’s liquidity, which fell to a 10-month low. They suggest that the market will overcome this issue by turning to alternative sources of liquidity, such as institutional investors and promoting stablecoin usage.

Lucas Kiely, Chief Investment Officer of Yield App, says that the recent failure of some banks has led to a decrease in market depth and wider bid-offer spreads. He emphasizes the importance of developing reliable and trustworthy off-ramps to support the market in times of liquidity concerns.

Sigal Biran-Nagar, VP of Marketing at GK8, notes that the collapse of US banks has resulted in a significant loss of liquidity and leverage for the crypto market. She suggests that the market needs clearer regulation and that exchanges and financial institutions have a role in educating consumers and regulators and making crypto accessible.

Aaron J. Rafferty from Standard DAO says that the loss of liquidity from the collapse of US banks has the potential to drive down the value of many crypto assets and create risks for traders. He highlights the importance of decentralized finance solutions and self-custody solutions in protecting assets in the event of a banking collapse.

Experts have opined that the current banking crisis in the US has shed light on the importance of liquidity in the crypto market and the potential solutions to overcome any future market disruptions.

About the author

Murtuza Merchant is a senior journalist and an avid follower of blockchain and cryptocurrencies.

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