Bitcoin’s liquidity is getting fragmented, meaning that the amount of Bitcoin available for trading is unevenly spread across different exchanges. This can lead to price discrepancies, especially on exchanges with less liquidity.
What’s the Big Deal?
Imagine you’re trying to buy a rare collectible. If only a few people are selling it, the price can fluctuate wildly depending on who’s buying and selling. It’s the same with Bitcoin. When liquidity is low, even small changes in buying and selling activity can cause big price swings.
The Recent Sell-Off:
This liquidity fragmentation was particularly noticeable during a recent sell-off in August. Bitcoin’s price dropped below $50,000 for the first time since February, and some exchanges saw even bigger price drops than others. For example, Binance US saw a much larger price drop than more liquid platforms.
Price Slippage:
Price slippage is a good indicator of liquidity. When liquidity is low, you might have to pay a higher price (or get a lower price when selling) than you expected. During the August sell-off, price slippage increased significantly on some exchanges, especially for trading pairs like Zaif’s BTC-JPY and KuCoin’s BTC-EUR.
Spot Bitcoin ETFs: A New Twist
The launch of US Spot Bitcoin ETFs has added another layer to the liquidity crisis. These ETFs hold a significant amount of Bitcoin, and they trade during traditional market hours, which means they close on weekends.
Weekend Volatility:
This has led to increased weekend volatility. Since the ETFs are closed on weekends, there’s less liquidity available, making prices more susceptible to swings. This means that price drops that start on Friday can get worse over the weekend.
The Bottom Line:
Bitcoin’s liquidity fragmentation and the impact of Spot Bitcoin ETFs are creating a more volatile market, especially on weekends. This means that investors need to be aware of the risks and be prepared for potential price swings.
