Cryptocurrencies are increasingly popular but continue to exhibit volatility akin to traditional currencies. This article examines the reasons for this volatility and its connection to liquidity.
Fragility of Liquidity in the Market
The cryptocurrency market is evolving, with a market capitalization of over $3.3 trillion as of July 1 and a daily trading volume exceeding $275 billion. However, despite these healthy metrics, underlying liquidity remains fragile. The foreign exchange market, touted for its high liquidity with over $7.5 trillion in daily trading volume, also showcases a rapid decrease in liquidity under uncertain conditions.
Phantom Liquidity in Cryptocurrencies
Volatility is particularly notable in crypto markets during geopolitical events. Recently, the conflict in Israel and Iran triggered asset sell-offs, including Bitcoin, which dropped by up to 5%. However, when confidence returned to the market, particularly after a ceasefire announcement, Bitcoin rose by 4.33%, highlighting liquidity constraints that contribute to significant price swings. Lingling Jiang, a partner at crypto investment firm DWF Labs, pointed out: "Sustained on-chain capital growth will require a much more robust liquidity architecture."
Fixing Fragmentation to Boost Liquidity
Market fragmentation in cryptocurrencies causes liquidity to be spread across various trading platforms, each with its own order books. This necessitates structural changes in market architecture. Implementing cross-chain bridging could unify liquidity pools and facilitate the smoother flow of capital.
The illusion of liquidity in cryptocurrency markets requires serious attention. Structural reforms are needed to ensure more stable operation of crypto assets during market fluctuations.
