Bitcoin market liquidity has hit a 10-month low, despite strong price gains this quarter. This has largely been attributed to the ongoing banking crisis in the United States, which has negatively impacted the cryptocurrency ecosystem.
Because of the circumstance, there has been an increase in price fluctuation, which has resulted in dealers incurring higher costs due to slippage.
The financial problem in the United States has had a direct influence on the cryptocurrency market, particularly on platforms located in that country.
The collapse of crypto-friendly banks like Silicon Valley Bank and Signature Bank has removed important U.S. dollar payment rails for crypto, leading to a liquidity crisis.
The dearth of liquidity on U.S. platforms has caused the price of Bitcoin to be more unpredictable compared to the price of Bitcoin on exchanges located outside of the United States.
The liquidity crunch has resulted in traders and the market suffering significantly. Conor Ryder, research head of on-chain data analytics firm Kaiko, explained that stablecoins have replaced U.S. dollar pairs, but this has indirectly harmed investors due to reduced liquidity in the United States.
Cryptocurrencies may provide an alternative amid the bank crisis in the United States
Despite a tough 2022, cryptocurrencies, especially Bitcoin and Ethereum, are gaining more acceptance due to the current financial crisis in the traditional financial market.
Last year was tough for the crypto market, but the March bank panic fueled hope for both Bitcoin and Ethereum. These two cryptocurrencies are considered to be the most stable, resistant to the detrimental effects of market volatility, and have successfully gone through the various crypto bankruptcies that occurred last year.
Bitcoin has surged to $28,000, the highest level since June last year. Meanwhile, Ethereum, though it was lower at some point, has not crashed.
This has led financial experts to believe that there is growing confidence in the use of cryptocurrencies, at least the two most popular cryptocurrencies. However, most of the optimism seems to point toward the use of cryptocurrencies overseas.
Impact of the liquidity crisis on traders and the market
The liquidity crunch has led to increased price volatility, forcing traders to pay more fees in slippage. The slippage for the BTC/USD pair on Coinbase climbed by 2.5 times at the beginning of March. On the other hand, Binance’s BTC/USDT pair’s slippage barely moved.
The drastic impact of the liquidity crisis on traders and the market has resulted in stablecoins replacing U.S. dollar pairs. Although this lessens the impact of U.S. banking troubles, it has an adverse effect on liquidity in the United States, indirectly harming investors there. The situation has forced some investors to move to non-U.S. exchanges, where prices are less volatile.
The ongoing banking crisis in the United States has impacted the crypto ecosystem, leading to a Bitcoin liquidity crisis. The collapse of crypto-friendly banks and the regulatory actions against crypto companies have further exacerbated the situation, causing a decrease in market liquidity.
Despite these challenges, cryptocurrencies such as Bitcoin and Ethereum are seen as reliable alternatives to traditional investments, especially overseas.
