Bitcoin Price Roaring, Why Is Liquidity Very Low And At Q4 2022 Levels?

The Bitcoin (BTC) price is roaring at spot rates, recently ripping above the July 2023 resistance level. The coin is at new 2023 highs, recovering after plunging in 2022. Part of the sharp sell-off, especially in November 2022, was because of the collapse of FTX and Alameda Research, the trading wing of the defunct crypto exchange.

BTC Rallying But Liquidity Is At November 2022 Level

According to reports by Kaiko, a blockchain analytics platform, Bitcoin’s liquidity is around the post-FTX collapse level, and the Alameda gap still exists. This development, it should be noted, is despite the rapid surge in crypto prices in late October and early November 2023.

Bitcoin, sparred by fundamental factors, is rallying, reversing post-FTX losses and spiking above the July 2023 high at around $32,000. The breakout to new H2 2023 highs was at the back of rising trading volume, suggesting that the uptrend is supported.

Kaiko notes that though Bitcoin rose 20% in October, the “Alameda gap” persists, and market liquidity remains generally deprived. The Alameda gap is the observed drop in liquidity that impacted the Bitcoin market after FTX filed for bankruptcy in November 2022. Then, as mentioned earlier, the collapse of FTX also saw Alameda Research, a trading wing associated with the exchange, fold.

While the collapse of FTX made headlines, Alameda Research was one of the top crypto and Bitcoin market markets. The firm provided liquidity by playing its role of actively buying and selling huge chunks of BTC on demand, allowing users to trade smoothly without slippage. Once it fell, there was a significant drop in Bitcoin liquidity, and this has never changed, even with Bitcoin prices more than doubling from 2022 pits.

Will Liquidity Increase After Spot Bitcoin ETF Approval?

With low liquidity across the board, trading Bitcoin is not as smooth as it was pre-FTX and Alameda Research collapse. However, the Alameda gap is narrowing at spot rates, but market liquidity remains lower by over 50%. 

The eventual approval of a spot Bitcoin exchange-traded fund (ETF) by the stringent United States Securities and Exchange Commission (SEC) might improve liquidity in the coming months. Specifically, a spot Bitcoin ETF allows investors to have direct exposure to Bitcoin without necessarily having to buy or sell the coin directly. 

Accordingly, this might increase the demand for Bitcoin and increase volatility. Moreover, because of the clearer regulation, since the product is approved by the SEC, more institutional interest could drive more capital into the industry.

Feature image from Canva, chart from TradingView