What Reduced Liquidity in a Post-FTX World Could Mean for Retail Investors

What Reduced Liquidity in a Post-FTX World Could Mean for Retail Investors

What Reduced Liquidity in a Post-FTX World Could Mean for Retail Investors

2022 has been a challenging year for crypto markets. The collapse of Terra (LUNA), Celsius, Voyager, and many others hit the industry hard. And then FTX happened.

The unfortunate events surrounding FTX have damaged investors’ confidence and seeded doubt throughout the industry. But what does this all mean for the average retail investor? We take a deeper look below.

Liquidity Matters. Here’s Why

With FTX and Alameda Research gone, global crypto markets have lost one of the biggest liquidity providers in the industry. 

Liquidity affects how investors can get in and out of their positions. It is absolutely essential to any financial market, particularly in cryptocurrency markets, which are awash in micro-cap tokens. 

Liquidity mitigates price manipulation and volatility. It plays a crucial factor in whether or not a large investor will enter a position or not. Without enough liquidity, it’s very difficult for larger investors to enter the field. 

How Liquidity Has Changed Post-FTX

In the cryptosphere, liquidity is highly dominated by market makers such as Kairon Labs, GSR Markets, and Alameda Research, just to name a few. But now that the market’s lost one of the biggest market makers – Alameda, we can expect a long-lasting liquidity gap in the market, making prices more volatile.

The liquidity drop observed over recent weeks is far larger than that of the previous market drawdown, according to a report by Kaiko. Liquidity across 18 different exchanges for Bitcoin (BTC) and Ethereum (ETH) has fallen to their lowest points since June of this year.

BTC liquidity within 2% of the mid price has fallen from 11.8k BTC to just 7k. Source: Kaiko  

ETH markets were also affected by the collapse, with 2% market depth falling to late May levels. Source: Kaiko

Opportunities in Volatile Markets

And yet, with increased volatility often comes more arbitrage opportunities. The market is likely to see more dislocations in the prices of certain tokens, particularly in smaller-cap tokens. Traders might be able to pocket larger profits if they can spot such opportunities. Using trading bots to detect and act on such opportunities could be a good idea. 

Liquidity aside, regulators around the world are racing to pass legislation to protect investors in the wake of FTX’s downfall. But increased regulation is a good thing in the long run. It shores up investor confidence and paves the way for more institutions to enter the field, resulting in a more stable and liquid market. Ultimately, we continue to remain bullish on the crypto industry and the opportunities it has to offer.

Key Takeaways

  • During times of reduced liquidity, be mindful when trading, as slippage and price manipulation can often occur.
  • At the same time, more sophisticated traders might be able to better spot and act on price dislocations.
  • As regulators pass more investor protection laws, expect investor confidence, trust, and stability to return to crypto markets.
  • Only invest what you can afford to lose. And always DYOR (Do Your Own Research).


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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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