Over the weekend, a key metric that tracks the liquidity of the cryptocurrency market took a sharp downward turn, resulting in paper-thin order books that can potentially amplify price swings. The global bid and ask indicator created by crypto research firm Hyblock Capital, which measures the dollar amount of resting bid and ask orders for over 1,100 listed coins, dropped by 20% in spot markets on Saturday.
This abrupt decline occurred as alternative cryptocurrencies, such as SOL, MATIC, DOGE, and others, experienced a crash amid rumors of a fund liquidating its coin holdings. According to Joe McCann, CIO of crypto hedge fund Assymetric, some market makers likely withdrew from the market during the altcoin crash, which led to the significant decrease in the number of resting bid and ask orders. McCann shared his observations on Twitter, stating that many market makers pulling inventory created paper-thin order books.
However, other experts believe that the fall in liquidity might have originated from a single market maker running out of collateral. With such thin liquidity, traders may find it difficult to execute large orders at stable prices, which means that small orders can have a disproportionately high impact on market rates.
Market makers play a vital role in the order book by supplying it with bid and ask orders and ensuring liquidity. On Saturday, the dollar amount of resting bid and ask orders waiting to be filled plunged by 20%. As per Hyblock Capital data, the green line, indicating the dollar amount of resting bid orders, and the red line, representing resting ask orders, both collapsed by over 20% to under $500 million during Asian hours.
This dip in liquidity could result in higher-than-average market volatility in the wake of the upcoming release of U.S. inflation data and the Federal Reserve rate decision. The U.S. consumer price index is set to be announced on Tuesday at 12:30 UTC, while the Federal Reserve is expected to maintain the status quo on policy rates on Wednesday at 18:00 UTC, as per Reuters data from FXStreet.
Considering the contrasting views over the cause of the liquidity decline, it remains to be seen how the cryptocurrency market will react to this unprecedented event. Will market makers return to stabilize order books, or will the effects of these thin liquidity conditions continue to pose challenges for investors and traders alike? With the fast-paced nature of the crypto world, only time will tell.
Source: Coindesk
