Bitcoin’s weekly surge could be driven by liquidity shortage 

Analysts suggest that Bitcoin’s recent surge could be driven by an ongoing liquidity shortage and declining stablecoin market cap. 

The ongoing liquidity shortage in the cryptocurrency market has been significantly impacting Bitcoin’s price, which has experienced dramatic fluctuations of over 10 percent in recent weeks.

According to research from FalconX, the average volume of Bitcoin trades within a 1 percent price range from its current value has been at its lowest for the year. This comes despite a renewed surge in trading activities, partially ignited by market speculation surrounding the potential approval of a Bitcoin ETF (Exchange-Traded Fund).

Bitcoin’s declining exchange reserve

How Does Low Liquidity Affect Bitcoin’s Price?

In financial markets, low liquidity means fewer buyers and sellers, making it more challenging to enter or exit positions without affecting the market. When liquidity is low, even a small number of trades can have a significant impact on the price. This is because there are fewer buyers and sellers, so it takes less volume to move the market, thus low liquidity environments are easier to manipulate.

A trader with a large enough position can artificially move the price up or down to their advantage. In a low liquidity environment, traders may attempt to capitalize on these price swings, thereby adding to the volatility.

The “Alameda Gap” and Its impact remains

Last year, blockchain analytics firm Kaiko termed the fall in liquidity as the “Alameda Gap,” tracing its origins to the financial troubles at Sam Bankman-Fried’s FTX. Market makers reportedly faced significant losses following FTX’s downfall, contributing to the lasting liquidity issues in the market.

On Oct. 16, a misleading report led to a temporary 10 percent spike in Bitcoin’s price, as it falsely claimed that the U.S. had green-lighted a long-anticipated Bitcoin ETF. The excitement was short-lived, however, as BlackRock subsequently clarified that its application was still under review by the SEC.

Just a week later, on Oct. 23, Bitcoin’s price again soared past the $35,000 mark—a level not seen in roughly a 18 months. This was triggered by market speculation hinting that a forthcoming BlackRock ETF ticker indicated an approval was around the corner. As of Monday, Bitcoin’s value was hovering around $34,400. 

Stablecoins and liquidity health

Another important indicator that analysts use to assess market liquidity is the overall market cap of stablecoins. Recent data from DeFiLlama shows a decline in the total market capitalization of stablecoins, further underscoring the ongoing liquidity issues.

The prevailing liquidity crunch and its compounding effect on Bitcoin’s volatility underscore the intricate dynamics and vulnerabilities of the cryptocurrency market. With growing interest but unstable foundations, how this liquidity shortage unfolds will be crucial for both retail and institutional investors.