As a reminder, liquidity is the property of assets to be sold quickly at a price close to the market price. The more liquid a market is, the greater the volume of transactions that can be conducted in it without significant price movements. In the case of banks, liquidity also indicates the ability to quickly convert crypto into traditional currencies and vice versa.

Liquidity is critical when exchanging digital assets for each other. And if it is blatantly poor, then trading can be problematic. The clearest illustration of this was when an anonymous trader reacted to the decoupling of USDC Stablecoin from the dollar in the first half of March.


As a reminder, Silicon Valley Bank survived the collapse at the time. As it turned out, Circle was holding 8 percent of the steiblocoin's collateral in it, which caused panic in the market. Eventually, however, the situation returned to normal and Circle changed its banking provider.


Alas, what happened was enough for the mentioned trader to lose $2 million in USDC. Due to difficult market conditions and activity of other traders, the exchange platform for some reason offered the user to use an irrelevant pool with a few dollars liquidity. As a result, two million turned into a couple of cents, although the user, due to inattention or haste, somehow agreed to such transaction conditions.

What happens to the cryptocurrency market

As you can easily guess, low liquidity leads to various problems – slippage, large spreads and spikes in the price of the asset in general. Here, in particular, we’re talking about the coin order book, which we wrote more about in this article.


To recap, slippage is the deviation of the traders' desired transaction price from the real one. This indicator is measured as a percentage and is primarily relevant for decentralized exchanges like Uniswap. Due to greater slippage, it is possible to execute trades with assets that do not have the best liquidity.

Let's imagine that an investor wants to exchange 10 ETH of $1,750 each on a decentralized exchange. However, there may not be enough liquidity pools willing to buy the asset at that price. Accordingly, the cryptocurrency owner can set a slippage of 5 percent. Here, this figure would mean that the trader is willing to see the price of his ethers slip as much as 5 percent of the set level, i.e., to $1,662. Most likely, there will still be buyers for ETH on the way down from $1,750 to $1,662, which will make the deal go through.


Kaiko’s head of research, Clara Medali, spoke in an interview with Decrypt about what else might happen after a significant drop in liquidity. Here’s the relevant line.

Initially a fall in liquidity helps prices rise, but then there could be a sharp fall. Once buyer activity has weakened, anything can happen to the price.

That is, poor liquidity does contribute to a steeper rise in the presence of buyers. However, as soon as the situation changes, the rates can go down at the same rate.

As a reminder, the liquidity crisis was first felt dramatically after Silvergate Bank’s SEN network closed, as it allowed easy entry into cryptocurrencies with fiat and vice versa. At that time, market depth plunged to around $200 million. This metric shows how much money it takes on average to change the value of the top ten cryptocurrencies by market capitalisation by 1 per cent.

Market depths for Bitcoin and Etherium are down 16.12 percent and 17.64 percent respectively since the beginning of this month.

This means that you now need to buy or sell 16.12 percent less bitcoins for the value of the major cryptocurrency to change by 1 percent up or down, respectively. In this context, the drop in liquidity opens up another danger to the market – the possibility of manipulation.

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What’s happening in the US economy the day before was the main topic of an unscheduled online meeting of the Financial Stability Oversight Council (FSOC) at the Treasury Department. Treasury Secretary Janet Yellen was also present at the discussion.

The conference was revealed in a brief announcement from the Ministry of Finance. Details on the topic are still scarce, but it is already clear that the Federal Reserve Bank of New York employees made a presentation on the state of the markets. Judging by the conclusion of the presentation, the experts came up with an encouraging prognosis. Here is the quote that Cointelegraph cites.

The board discussed current conditions in the banking sector and noted that although some institutions have come under stress, the US banking system remains sound and resilient.

There is a view that the results of the online meeting can be considered good news for the cryptocurrency market. Judging by the list of participants in the discussion above, Federal Reserve Chairman Jerome Powell also shared his views on the benchmark lending rate. The day before, the rate was raised by 0.25 percent, but many analysts have come to a consensus that the final rate ceiling will still be lower than expected. And the prospect of a rate cut is good news for risky assets anyway.


We believe that the current liquidity problems in the coin market are triggered by both the bearish trend and low popularity of cryptocurrencies, as well as the collapse of the FTX crypto exchange in November 2022. Still, given the collapse of centralised platforms, many users have started to withdraw their own assets from trading platforms, including decentralised alternatives. Therefore, we can assume here that digital assets will once again become a popular choice for traders and investors after the start of the bull run. Accordingly, there will be more trading on exchanges than there is today.