PYMNTS-MonitorEdge-May-2024

Liquidity in Digital Asset Market Remains Low

The liquidity in the digital asset market is reportedly about half of what it was at the time the crypto exchange FTX collapsed about a year ago.

The sudden drop in liquidity has affected market participants and raised concerns about the future, Bloomberg reported Tuesday (Oct. 3).

Referred to as the “Alameda Gap” by blockchain-data firm Kaiko — after Alameda Research, the trading arm of FTX — the liquidity decline can be attributed to the significant losses suffered by market makers after the collapse of the FTX cryptocurrency platform founded by Sam Bankman-Fried, who is going to trial on fraud charges, according to the report.

Market makers, who play a crucial role in maintaining liquidity, suffered big losses due to their exposure to devastated crypto projects and FTX’s cryptocurrency, FTT, the report said. Researchers at Kaiko believe the FTT token acted as a trigger for FTX’s collapse, creating a multibillion-dollar hole in the company’s balance sheet.

The decline in liquidity has made it more challenging for users to buy or sell assets, leading to increased market volatility, per the report. According to Kaiko, crypto trade volume, market depth and price volatility have hit multiyear lows over the past 11 months. Despite this, token prices have rebounded, indicating that investor confidence in cryptocurrencies remains intact.

FTX, known for its low fees, high liquidity, and extensive offering of crypto assets, processed nearly $100 billion in trading volume every month at its peak, according to the report. However, the majority of FTX’s trading occurred on its derivatives platform.

The trial against Bankman-Fried alleges that he hid the extent of the ties between FTX and Alameda Research from investors, the report said. The Securities and Exchange Commission (SEC) claims that Bankman-Fried directed that FTX’s “risk engine” should not be applied to Alameda, effectively creating an unlimited line of credit funded by FTX customers. Bankman-Fried has pleaded not guilty to all the charges against him.

Building up a crypto liquidity pool will increase crypto as an asset class and widen its appeal among investors, Dr. Yan Zhang, CEO at Airswift, wrote in an article posted by PYMNTS in April.

“Amid positive sentiments on the future of crypto, the industry now faces the challenge of fixing its worsening liquidity problem,” Zhang wrote at the time.

PYMNTS-MonitorEdge-May-2024