Liquidity conditions within the Bitcoin and Ethereum markets continue to deteriorate. At the moment, the situation is even more alarming than three months ago, which makes traders worry about price fluctuations at the moment. But what does it actually mean if liquidity deteriorates?
What is Liquidity?
When we talk about “liquidity” in the financial world, it refers to the market’s ability to absorb large buy and sell orders. The most commonly used metric for measuring liquidity conditions is 2 percent of the depth of the market. This involves taking a collection of buy and sell orders that are within 2 percent of the mid-price or average of the bids.
The more significant the depth, the more liquid an asset. If an asset is extremely liquid, it is in principle very difficult to set the price in motion just like that. Higher liquidity is generally seen as an important condition for big boys and girls to trade the asset in question.
If there is practically no liquidity, it is too dangerous for the larger investors to step in. There may come a time when they want to sell and it is not possible to get out of the asset without incurring enormous damage.
Lowest since May 2022
Looking at the data from Paris-based Kaiko, we currently see that the market depth for Bitcoin against USDT has dropped to 6,800 Bitcoin on 15 centralized exchange platforms. That’s the lowest level of liquidity since May 2022, when Terra imploded. With that score, liquidity is currently also below the level after the collapse of FTX.