Over the past two weeks, the price of Bitcoin (BTC) has seen significant swings. According to data from Kaiko, this increased volatility is partly due to the decline in liquidity in the Bitcoin markets, one of the explanations can be traced back to the bankruptcy of FTX. On-chain analysis of the situation.
A particularly volatile month of April
In the past two weeks, the price of bitcoin (BTC) has experienced significant variations, oscillating with great volatility in a range between 27,300 dollars and around 30,300 dollars.
The day of April 26 was particularly rich in emotions : First registering a 10% rise in price, a powerful fall then caused significant liquidations of participants who had bet on the rise in the derivatives markets, all in less than 24 hours.
Figure 1: Daily price of BTC
As the data from Kaikowhich we had studied during our November 2022 analysis, this increased volatility is partly due to a drop in liquidity in the BTC marketsone of whose origins dates back to the bankruptcy of FTX.
6 months after these events, we will observe in this analysis the state of the spot markets through a study of the liquidity of the supply in circulation.
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An increasingly less liquid market
Following the collapse of FTX and Alameda Research, Kaiko identified a noticeable drop in liquidity in Bitcoin marketscaused by the fall of one of the largest market makers in the sector.
👉 Definition and explanation of what a market maker is
As this lack has not yet been filled, and certain US banks serving as an entry/exit point for institutional capital have had to close, such as Silvergate Bank or Signature, the flow of capital circulating within the global market has been limited.
With reduced liquidity, market makers find it more difficult to balance gaps between bid and ask in order bookswhich causes an increased magnitude of price changes, or an increase in volatility.Figure 2: BTC market depth
The depth of the market, put forward by Kaiko, is a very relevant indicator in this regard. By accumulating buy and sell orders within +/- 2% of the average price on different exchanges, this metric provides an excellent proxy for overall market liquidity.
What is obvious from the graph above is that we are currently at the lowest liquidity levels in 10 monthseven lower than after the collapse of FTX.
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When market liquidity is low, the friction between supply and demand in the order books causes volatility to rise. Price variations then have more explosiveness, but less consistency, whether downward or upward.
Figure 3: Monthly volatility of BTC and Nasdaq
Kaiko analyst Conor Ryder points out in a research article of March 23, 2023 that:
“The rise in BTC in the second quarter was impressive, but […] it seems that much of this rise can be attributed to low market liquidity. Low liquidity means prices can fall as quickly as they rise, so investors can expect more volatility in the short term. »
In such a market environment, the influence of derivatives markets on the spot price is significant, so speculation can dictate the value of BTC in spot markets.
This can cause a very artificial evolution of bitcoin prices, like the volatility recorded during the day of April 26, 2023 for example.
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The state of reserves on the spot markets
In this section we will study the state of BTC reserves in the spot markets in order to anchor the lack of liquidity, explained above, in a broader context.
The BTC reserves of the exchanges have experienced a bullish momentum between 2011 and 2022peaking at 3.2 million bitcoins in March 2020, or 17.5% of the circulating supply at the time.
Since the COVID flash crack, however, this trend has reversed.bringing exchange reserves back to where they were 5 years ago, in May 2018.
Figure 4: BTC reserves of centralized exchanges
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Today, nearly 2.3 million BTC are still held on centralized exchanges, now representing 12% of the supply in circulation.
Since several CEX such as Binance, Kraken, ByBit or Bitfinex are also derivatives providers, a drop in their BTC reserves implies a drop in their liquidity. and therefore a difficulty in reducing the friction between supply and demand on their marketplaces.
The exodus of BTC from exchanges, accentuated by the collapse of FTX, therefore reinforces the fall in liquidity.
If many BTCs are withheld and spared by participants, a phenomenon called liquidity shock takes place.which has the effect of increasing market volatility.
While this tends to favor a long-term rise in price, in response to growing demand, the short-term effects are harder to predict.
Figure 5: Illiquid BTC Supply
The graph above represents the evolution of the number of so-called “illiquid” BTCs, with a low or non-existent spending history, mainly held outside exchanges over the long term and with a strong conviction of conservation.
Numbering 12.6 million in May 2018, illiquid BTCs are now close to 15 million. It is therefore almost 77.48% of the supply in circulation which is currently withdrawn from the liquid supply.potentially increasing friction in CEX order books.
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The state of derivatives markets
After studying the state of BTC reserves on the spot markets and the evolution of illiquid supply, let’s take a look at the derivatives markets and in particular the BTC futures markets.
👉 What is a futures contract?
At first glance, the high volatility recorded in recent days could lead us to assume that the open interest (the total capital invested in the futures markets) must be quite high.
Nevertheless, after an ATH of speculation in November 2022, ETH and BTC open interest saw a massive purgereturning to the levels recorded in 2021 and during the first half of 2022.
Figure 6: BTC and ETH open interest
Currently sitting at nearly 350,000 BTC, Bitcoin open interest has broken out of the overheated zone that we had documented within June 2022 analysis.
The collapse of FTX and the ensuing price crash obviously caused a major purge of leverageremoving over 310,000 BTC from the futures markets in the space of six months.
So, it is obviously the lack of liquidity in the spot markets that is fueling the recent volatilitythe levels of speculation in the derivatives markets not being particularly high.
Summary of this on-chain analysis of BTC
This week’s data suggests that liquidity in bitcoin markets lowest since november 2022. The failure of FTX appears to have had a pronounced impact on market performance, causing a period of high volatility over the past few weeks.
Exchange reserves have returned to May 2018 levels, indicating that a mass exodus of BTC from exchanges is underway. This dynamic clearly contributes to the fall in liquidity on market places such as Binance, Kraken or Bitfinex, which are also derivatives providers.
Illiquid supply now accounts for nearly 78% of circulating supply and tends to grow with every notable correction in the price of BTC since the bankruptcy of FTX.
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Sources – Figures 1 to 5: Glassnode
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