• Nearly $24 billion of stablecoins have left exchanges since last November.
• Crypto prices have risen this year, but liquidity is falling in the crypto space due to regulation concerns and capital moving elsewhere.
• Thin liquidity could lead to amplified moves both upward and downward in the future.
Liquidity Drain in Crypto Space
The crypto sector has seen a significant outflow of capital as nearly $24 billion worth of stablecoins have left exchanges since FTX insolvency last November. This has caused the total marketcap of stablecoins to dip by 16 billion dollars over that time, while Bitcoin prices continue to rise.
The US regulatory environment continues to be a major challenge for crypto firms, with the SEC clapping back at accusations that it is lack of clarity causing problems, instead citing “mass non-compliance” on part of crypto firms. This has resulted in two prominent market makers – Jane Street and Jump Crypto – scaling back operations in the US.
With liquidity so low, prices can move up more rapidly than normal with less capital needed to shift shallow order books on exchanges. However, this could also result in amplified moves downward as well as upward if liquidity remains thin in the long-term.
Inflation & Interest Rates
Inflation has decreased and forecasts around future path of interest rates have softened over past six months which may account for some increase in Bitcoin prices despite continued outflows from the sector.
Crypto markets are facing a tough time due to decreasing liquidity and strict regulatory climate which are likely contributing towards capital leaving the space despite rising asset prices. It is unclear how these issues will be addressed going forward but it is clear that thin liquidity could cause amplify moves both upwards and downwards if not resolved soon.