Crypto Market Plunges 20% Over Weekend, Signals Low Liquidity

Key Points:

• A key metric tracking the crypto market liquidity tanked sharply over the weekend, leaving paper-thin order books that could amplify price swings.
• Crypto research firm Hyblock Capital’s global bid and ask indicator, which aggregates the dollar amount of resting bid and ask orders for more than 1,100 coins listed worldwide, fell by 20% across spot markets on Saturday.
• Thin liquidity means traders might struggle to execute large orders at stable prices. Both collapsed over 20% to under $500 million during Saturday’s hours.

Over the weekend, the crypto market experienced a sharp decline in liquidity, which could increase volatility.

The global bid and ask indicator, created by crypto research firm Hyblock Capital, fell by 20% across spot markets on Saturday. The indicator tracks the dollar amount of resting bid and ask orders for more than 1,100 coins listed worldwide, making it an important metric for the crypto market.

The decline happened as various alternative cryptocurrencies, including SOL, MATIC, DOGE, and others, crashed amid rumors of a fund liquidating its coin holdings. This caused some market makers to likely pull out from the market, leading to a significant drop in the amount of resting bid and ask orders.

According to Joe McCann, CIO of crypto hedge fund Assymetric, the @hyblockcapital Global Bid/Ask metric dropped a full 20% during the altcoin collapse, indicating a bunch of market makers pulled inventory, creating paper-thin order books. Other observers suggest the decline in liquidity stemmed from a single market maker running out of collateral.

Thin liquidity can cause traders to struggle to execute large orders at stable prices and allows small orders to have an outsized impact on the going market rate. To understand this, we need to know how an order book works. An order book lists all outstanding orders and quotes in a particular financial instrument posted by market makers and other market participants. The highest price a user is willing to pay to buy the instrument is called the bid, while the lowest price at which someone is willing to sell the instrument is called the ask or offer. A resting order is a limit order to buy at a price below or to sell at a price above the going market rate.

Market makers are entities responsible for creating bid and ask orders and providing liquidity to an order book. The green line in the Hyblock Capital global bid and ask indicator represents the dollar amount of resting bid orders, while the red line indicates the resting ask orders. Both collapsed over 20% to under $500 million during Saturday’s hours.

As a result of the liquidity decline, the market could see above-average volatility following the U.S. inflation data release and the Federal Reserve rate decision. The U.S. consumer price index is scheduled for release on Tuesday at 12:30 UTC, and the Fed is expected to maintain a status quo in policy rates on Wednesday at 18:00 UTC, according to Reuters data from FXStreet.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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