Liquidity in dynamic crypto markets is ultra-concentrated, even more so over time, as only a handful of crypto exchanges have emerged as dominant forces holding most of the market’s liquidity.
As per the recent analysis on Kaiko, 8 exchanges hold the lion’s share of the trading volume and market depth. Market Makers are progressively supplying liquidity at a tight range while altcoin liquidity is concentrated on offshore exchanges.
Crypto market liquidity concentration
Nearly 92% of the market depth and 90% of the trading value is spread through the eight exchanges. For instance, Binance controls 30% of the cryptocurrency market depth and 60% of the trade volume in 2023.
Since 2021, Binance trade volume has increased by 26%, closely linked to the Binance Zero fee trading promotion. The promotion, however, had the opposite effect on the market depth as it fell by 12%. However, the 8 top exchanges still hold the global market depth, which has stayed consistent over the years.
Other exchanges include Huobi, Coinbase, and OKX. There are hundreds of exchanges, although only a few see any trading, according to data fromCoinGecko. According to data by Kaiko, the altcoin market depth is also heavily concentrated on three platforms within the US available exchanges.
Concentrated markets can either be bad or good for the market. According to Clara Medalie and Dessislava Aubert, Kaiko analysts, there is a shortage in liquidity, which, when spread out across many trading and exchanges, may intensify the market’s volatility and disrupt the price discovery process.
The analysts also added that the natural market forces have led to increased liquidity on only a few platforms, which is beneficial to the average trader. However, this can also be lethal to the market as highly concentrated exchanges can create failure points for the industry. They also noted potential pitfalls, such as market disruptions, as was the case in the collapse of FTX.
Centralized exchanges lack basic safeguards for traders in case of market manipulation and hacks. By understanding the concentration of liquidity, investors and traders can make informed decisions on where and when to place their capital for better results.
The market suffered huge losses last year with a significant price dip and the collapse of standout firms in the industry, such as Three Arrows Capital, BlockFi, and the Celcius Network, which led to the fleeing of many investors who had lost billions.
Many analysts have been closely following the crypto markets’ trading volumes and liquidity measures as investors retreat, regulatory crackdowns on various exchanges, and volatility hits longtime lows since moves can be inflated when trading volumes are thinner.
August records worst trades in the year
August registered the lowest trading volumes. The total monthly volume of the spot and derivatives plummeted to $2.09 trillion, recording a staggering decrease of 11.5%. This figure is only surpassed by the lowest trading volume recorded in October 2020, according to data recorded by CCData.
This is another indication of the reduced investor interest in the market and an unexpected one, too, given the buzz created by the potential Bitcoin ETF, which many would expect foreseeing investors to position themselves for in the market.
The market’s volatility remained controlled over the summer, with Bitcoin trading within a tapering range for months. The coin exhibited volatility this weekend on Friday, trading at $25800. According to K33’s Vetle Lunde and Anders Helseth, in a note, the choppy market over the last few weeks shows a dynamic volatility in the coin.
The last few months saw reduced volatility in the market Despite there being no significant changes in the prices following the August 17 dip, the daily volatility renewed the interest and participation of traders.
Liquidity, measured in market depth and trade volume, is highly concentrated on just 8 out of the hundreds of exchanges globally. While it may be ideal from the market’s perspective for liquidity to be concentrated on a small number of exchanges, the crypto market values decentralization, and as it is, there is little decentralization, which may be lethal for the industry.
