Trading Cryptos Has Never Been So Risky: Exchange Liquidity Dries Up
The cryptocurrency market is currently facing a significant liquidity crisis as a result of recent regulatory actions taken by the Securities and Exchange Commission (SEC). Exchanges such as Binance, Binance.US, and Coinbase have been targeted by the SEC for offering trading of unregistered securities, which has led to a decrease in liquidity and increased risks for traders.
Decline in Market Depth
One of the consequences of the SEC’s actions is a significant decline in market depth for the top 10 cryptocurrencies. Bittrex, Binance.US, and OKCoin have all experienced a substantial drop in market depth for these cryptocurrencies. Bittrex’s market depth is down 68%, while Binance.US and OKCoin have both seen an 85% reduction year-to-date.
The decrease in liquidity is a cause for concern as it makes it easier for market manipulators to exploit asset prices, leading to fluctuations that can facilitate “pump and dump” schemes. Traders may also experience unexpected losses due to slippage, where the execution price of an asset differs from the intended price. Additionally, low liquidity can make it difficult for traders to exit positions due to a lack of counterparties on low-liquidity exchanges.
Bitcoin Liquidity Decline
The decline in liquidity is not limited to altcoins. Even Bitcoin, the largest cryptocurrency by market cap, has been affected. The global liquidity of Bitcoin has fallen by over $10 million in the second quarter of 2023. This trend is compounded by the decision of market makers such as Jane Street and Jump to wind down their liquidity operations in the US.
Ki Young Ju, CEO at CryptoQuant, highlights the decline in sell-side and buy-side liquidity for Bitcoin and major stablecoins. BTC exchange reserves are down 20% in a year, ETH down 40%, and stablecoins down 52%. This further exacerbates the liquidity crisis and presents additional risks for traders.
Risk Management Strategies
Despite the challenges posed by the liquidity crisis, traders can employ various risk management strategies to mitigate the risks. Trading on exchanges with high trading volumes and narrow spreads can provide more stability. Monitoring market depth and order books can help traders gauge liquidity levels, while using limit orders instead of market orders can minimize slippage. Diversifying trading activities across multiple crypto exchanges can also help avoid overexposure to a single platform.
The current liquidity crisis in the cryptocurrency market has made trading riskier than ever. Regulatory actions by the SEC have led to a decline in market depth and increased risks for traders. However, by staying informed, using reliable platforms, and employing smart trading strategies, traders can navigate the current uncertainty in the crypto market.