Bitcoin’s recent market performance has been overshadowed by concerns about liquidity and the potential for massive sell-offs by so-called “whales,” entities that hold significant amounts of cryptocurrency. As August draws to a close, Bitcoin has lagged traditional assets amid concerns that governments and other major holders will begin to liquidate their holdings. This Bitcoin market liquidity analysis examines the factors contributing to these concerns and the potential implications they could have for the broader cryptocurrency market.
Potential whale selling
A major factor that makes the Bitcoin market unstable is the possibility of a large-scale sell-off by major holders, including governments. Research firm Kaiko highlighted in a recent report that the US, China, the UK, and Ukraine could be the main sources of Bitcoin disposal. The US government is known to hold around 203,220 Bitcoins, while China holds around 190,000, the UK 61,200, and Ukraine 46,350. These holdings, often seized in criminal cases or received as donations, represent a significant oversupply in the market, and are estimated to be worth up to $33 billion.
The possibility that these institutions could sell off their Bitcoin holdings has been a recurring theme throughout the summer, raising concerns about the impact on market liquidity and price stability. Furthermore, the now-defunct Mt. Gox exchange has approximately 46,170 Bitcoins left to distribute to bondholders, further impacting the potential supply that could enter the market.
Kaiko analysts Adam Morgan McCarthy and Dessislava Aubert noted that “well-known holders could be a potential source of selling pressure in the coming months,” adding to concerns that such large sell orders could impact an already thin market, sending the Bitcoin price lower further.
Volatility increases due to reduced liquidity
Liquidity in the Bitcoin market has steadily declined, exacerbating the potential impact of large sell orders. Bitcoin fell by about 10% in August, in stark contrast to the 2% gains seen in global stock and bond markets over the same period. This reduced liquidity has made the market more vulnerable to price fluctuations, as volumes are low and even relatively small trades can have a significant impact on prices.
Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors LLC, noted that “spot market volumes for Bitcoin remain low,” contributing to the price action seen in recent weeks. Farrell noted that the seven-day average of Bitcoin volume, a key metric that divides volume by market value, has fallen to around 2% from a high of nearly 5% during Bitcoin’s record rally in March. This decline in volume further highlights the liquidity issues currently facing the market.
Challenges of ETF Trading
Liquidity issues in the Bitcoin market have also affected the performance of Bitcoin ETFs in the United States. According to a strategist at JPMorgan Chase & Co., the trading environment for Bitcoin ETFs in the United States is becoming increasingly difficult. This is partly reflected in the Hui-Heubel ratio, which is a measure of liquidity by analyzing the number of transactions required to move the price. Since March, this ratio has worsened for all spot Bitcoin ETFs, indicating an overall decrease in liquidity.
Daily trading volumes for U.S. Bitcoin ETFs have fallen significantly from a high of over $10 billion in March to less than $2 billion. The decline in trading activity is a clear sign of weakening investor interest in these products, further contributing to the liquidity issues plaguing the Bitcoin market.
Conclusion: A Cautious Outlook on Bitcoin
As the Bitcoin market struggles with liquidity issues and the threat of a looming sell-off, investors should remain cautious. Significant price volatility remains a possibility, especially as market liquidity continues to thin. While the long-term outlook for Bitcoin may be positive, the short-term risks associated with these liquidity issues cannot be ignored.
For investors, understanding the dynamics of Bitcoin market liquidity is critical to navigating the current situation. As the market adapts to these challenges, being informed and strategically positioned will be critical to managing risk and capitalizing on potential opportunities in the ever-evolving cryptocurrency world.
Featured image: Freepik
See disclaimer