Binance Liquidity Decline Triggers Bitcoin Volatility: Impact of US Banking Failures and Promotions

Intricate cityscape with Bitcoin symbol dominating skyline, turbulent storm clouds above, abstract banking buildings crumbling, silhouettes of alarmed traders in foreground, chiaroscuro lighting, tense atmosphere, dynamic brushstrokes, hues of orange and blue denoting uncertainty and discord.

Binance has witnessed a steady decline in trading volumes and liquidity in the first quarter of 2023 due to a combination of factors, including the adverse effects of the U.S. banking failures and the termination of its zero-fee promotion. As a consequence, this has resulted in considerable volatility in the price of Bitcoin, according to Kaiko analyst Dessislava Aubert.

Aubert highlights that Bitcoin liquidity on Binance has more than halved since the beginning of February, going from approximately $45 million to $16 million in early May. The main driving factor behind this decline was the discontinuation of Binance’s 10-month zero-fee promotion, which was applicable to 13 different BTC pairs. This led to the exodus of market makers from the platform, causing monthly trading volumes for the BTC-USDT pair, the exchange’s most traded, to plummet from $16 billion in March to just $2 billion in April.

The situation was further exacerbated by the banking failures earlier this year, including the collapse of major cryptocurrency on-ramps, Silvergate, and Silicon Valley Bank. These events impacted several firms, such as Ripple, Circle, Yuga Labs, among others. Binance’s 1% market depth witnessed a significant decline following these failures, impacting the overall liquidity in the market.

In an environment marked by low liquidity, thin order books on exchanges allow for large orders to create wild price swings. This has been the case recently, as Bitcoin’s price experienced a sudden, inexplicable movement. Aubert suggests that this volatility is unlikely to subside, especially considering that major market makers such as Jane Street and Jump Crypto have revealed plans to reduce their crypto exposure.

It is worth noting that despite favorable conditions like a positive CPI report and market expectations leaning towards an interest rate cut in the future by the U.S. Federal Reserve, Bitcoin’s price still fell this week. A low-interest rate environment typically spurs cheaper debt in the economy, fueling a rise in speculative assets like Bitcoin. However, the digital asset failed to embark on an upward trajectory, primarily due to the prevailing poor liquidity conditions.

In conclusion, the decline in Binance’s liquidity, trading volumes, and the unfavorable impact of U.S. banking failures have produced a challenging situation for the crypto market. The heightened volatility experienced by Bitcoin showcases the need for stable market conditions and robust liquidity to ensure growth and stability in the world of cryptocurrencies.

Source: Decrypt

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