Danger ahead? Bitcoin faces price turbulence as market liquidity falls

Bitcoin eyes bull revival

Bitcoin faces price turbulence as market liquidity falls


 

 

With liquidity falling in the bitcoin market, smaller trades can have a relatively large price impact, according to analysts.

Bitcoin’s falling market liquidity – how much is available for trades – is raising the risk of wild price swings, analysts at JPMorgan have hinted.

“Market liquidity is currently much lower for Bitcoin than in gold or the S&P 500, which implies that even small flows can have a large price impact,” Bitcoin’s falling market liquidity – how much is available for trades – makes it prone to wild price swings, JPMorgan’s Nikolaos Panigirtzoglou wrote in a note on Friday, as reported by Bloomberg.

While bitcoin (BTC, -6.41 per cent) has rallied by over 300 per cent since mid-October, the number of coins held in exchange addresses has declined by 6.6 per cent to 2.38 million, according to Glassnode data.

This sell-side liquidity shortage has been exacerbated by strong institutional demand, allowing the steep price rally to record highs over $58,000 Sunday.

The low liquidity is also evident from bitcoin’s average daily spot and futures market volume of $10 billion, which is just 10 per cent of gold’s $100 billion, according to Panigirtzoglou. Hence, relatively few large buy or sell orders could lead to significant price moves either way.

Bitcoin’s three-month realized volatility, its level of actual price fluctuation over the past 90 days, stood at 92 per cent on Sunday, the highest since June 9, 2020, according to Skew. Meanwhile, the three-month implied volatility, or investors’ expectations of price swings over the next 90 days, was 94 per cent.

At press time, bitcoin is trading near $54,070, representing a 5.7 per cent drop over 24 hours, according to CoinDesk 20 data.