Low Liquidity of the Recent Crypto Rally is hampering Big Purchases

Large traders and crypto whales seem to be keeping a healthy distance between them and the present surge of cryptocurrency prices. The traditional markets saw a risk reset as well, allowing for new year rallies across the board. However, the big shakers and movers of the crypto domain do not like the present outlook of things which is also why no big purchase of digital assets took place. The same goes for any whale that accumulated in the recent downturn and who is not looking to turn a profit. 

For them, the situation is still not where they would want it in terms of a price breakout. Still, the issue of low liquidity in the crypto markets is not such good news and one more indicator that the possible relief rally in the BTC market might be either missing or short-lived. All the while the problems of the global economy remain as high as they were in December 2022, with few signs that things are moving in anything even resembling a stabilization or improvement. 

Risk Appetite

The willingness to take risks is rising across traditional markets. In the US, there has been a significant move up in the stock market as traders find a lot of optimism in the Federal Reserve. This institution, according to those optimistic estimates, might be close to ending its cycle of liquidity tightening. In China, long-term prospects are nowhere near optimistic and positive, as healthcare experts believe that most of the population will see an omicron strain infection in the coming weeks and months.

But, the fact that China is opening up will provide a certain short-term boost to spending and the internal economy and productivity of the country. So, with two of the biggest economies in the world turning their gear towards what is at least not another certain step-down, the traders are willing to risk things a bit more as well. The same spreads like it usually does across social circles, so esports players, crypto enthusiasts, and ordinary investors are also likely to get swept up in the excitement and decide to once more – or for the first time – invest in the digital currency market.  

Liquidity Problem

In the context of financial markets, including the crypto domain, liquidity refers to the ease with which an asset can be bought or sold without significantly affecting the asset’s price. A market with high liquidity is one in which there are many buyers and sellers and it is easy to trade large quantities of an asset without greatly affecting the asset’s price. In contrast, a market with low liquidity is one in which there are few buyers and sellers and it is difficult to trade large quantities of an asset without significantly affecting the asset’s price. 

In the crypto markets, liquidity can be influenced by a variety of factors such as the number of exchanges that list a particular cryptocurrency, the trading volume of a particular cryptocurrency, and the level of institutional involvement in the market. All of these factors are basically always in play and influence how the level of liquidity is presenting itself day in and day out. Cryptocurrencies that are listed on many exchanges and have high trading volumes tend to have higher liquidity than cryptocurrencies that are listed on fewer exchanges and have lower trading volumes. Similarly, the more institutional investors that are involved in a cryptocurrency market, the higher the liquidity is likely to be. But, in the depth of the crypto winter, the liquidity levels are abysmal across the board and early January 2023 seems to be underlining that once again.

Bear Market and Money Access

When market sentiment turns bearish, as it always happens before a prolonged crypto downturn, it can lead to a decrease in demand for a particular asset and can cause the asset’s price to decrease. In a market with low liquidity, a decrease in demand can lead to a larger price decrease than in a market with high liquidity because there are fewer buyers to absorb the selling pressure. Similarly, when sentiment turns bearish in a low liquidity market, it can be difficult to find buyers for large quantities of an asset, making it difficult to exit positions and leading to potential losses. But, it is also worth noting that low liquidity can cause further exacerbation of market volatility which can lead to panic selling and even more price erosion. 

Due to that, market participants are mostly aware of the liquidity of the assets they are trading and are prepared for potential price swings in times of low liquidity or bearish sentiment. That time is unraveling at the present moment and drowning any chance of an actual and strong rebound in the crypto domain. In general, crypto whales are among the most mindful about the same factor and will be the first to strongly respond to a sudden rise in liquidity. The flip side is that they will avoid any opposite moment, no matter how outwardly the situation might seem beneficial for a quick turn of profit.

Bitcoin Potential

In the problem of liquidity, the best chances are still with bitcoin. This token is considered to be the most liquid asset in the crypto market, meaning it is the easiest and most efficient to trade compared to other cryptocurrencies. This is due to a combination of factors that all contribute to its high liquidity. One of the main factors is the high trading volume of bitcoin, with billions of dollars worth of it being traded on a daily basis. This makes it easy for traders to buy or sell large quantities of bitcoin without affecting the price significantly. 

Additionally, BTC is widely available on a large number of exchanges, both decentralized and centralized, which makes it easy for traders to access bitcoin markets and find counterparties to trade with. Another important factor is bitcoin’s high market capitalization, which is much higher than that of any other cryptocurrency. This means there is a large amount of bitcoin available to be traded in the market. Furthermore, bitcoin has a long-standing history since its creation in 2009, it has a long track record which also contributes to its high liquidity. Finally, institutional investors have also increasingly shown interest in bitcoin in recent years, which has brought more liquidity and perceived trustworthiness of the asset, even with all of its issues. That is why if any coin stands a chance for a rally in the coming weeks, it is the BTC.

Source: Coindesk