Anybody who’s been round in crypto longer than the final six months or so will know that by way of liquidity, we’ve by no means had it so good. We’ve got institutional buyers to thank, who’re bringing the sort of liquidity that solely comes from high-value trades and investments. Nevertheless, in institutional phrases, liquidity has a number of sides, and there’s nonetheless loads of room for enchancment.
Earlier this yr, eToroX commissioned a report that surveyed varied contributors within the institutional markets. It reveals some attention-grabbing findings relating to how institutional buyers understand liquidity within the crypto house and its challenges.
For the survey respondents, the market cap was by far a very powerful issue affecting crypto asset buying and selling liquidity. Throughout most of 2020, the entire market cap of the complete crypto sector was hovering round $350 billion, deemed too small to be of curiosity to most institutional gamers. Nevertheless, because the market cap of the crypto markets, and later of BTC as a single asset, rose above $1 trillion, establishments have been flocking into the house.
A Precarious Scenario?
That is each thrilling and considerably worrying. In spite of everything, if institutional buyers are dashing to Bitcoin when costs, and thus market cap, is excessive, then absolutely it follows that they’ll exit simply as rapidly if costs fall. And Bitcoin has type right here – take a look at the precipitous drops following the final bull run in 2017. The worth went from its earlier all-time excessive of $20,000 to below $2,000 a yr later.
Nevertheless, it’s price contemplating the opposite components institutional buyers deem essential for liquidity, as they’re simpler to affect than worth. After the market cap, respondents cited worth transparency, adopted by ease of market entry. Market fragmentation was additionally a consideration, though much less vital than others.
These are all historic points within the cryptocurrency markets. Though backside on the record, fragmentation is a root explanation for the opposite two factors in lots of respects. The huge alternative of exchanges and buying and selling venues makes it tougher to enter the markets and in addition makes it tougher to repair the “actual” worth of any given asset with barely totally different spot costs throughout venues.
Fragmentation additionally dilutes liquidity, as even a well-liked buying and selling pair like BTCUSD usually solely has the depth of liquidity of a single alternate. There are few methods for anybody to entry the complete liquidity of the BTCUSD markets throughout all buying and selling venues. Lengthy-time crypto customers are used to this fragmentation, and for the dimensions of trades for many particular person buyers, it’s not a big problem. Nevertheless, it’s a phenomenon not present in different markets like shares or foreign exchange. Moreover, the comparatively small dimension of the crypto markets compared to others makes it extra of a problem for establishments.
Maturing Markets Present Hopeful Indicators
At this level in 2021, the markets have matured sufficiently that these points are slowly changing into much less problematic. As establishments have began to point out extra curiosity, the supply of companies resembling liquidity aggregation and full-service prime brokerage has grow to be extra commonplace. They assist make costs extra clear, ease the transition into the crypto markets, and scale back the liquidity problem of fragmentation.
Nevertheless, it’s price contemplating the truth that these points and market cap are intrinsically linked. On condition that establishments view market cap as a very powerful issue affecting liquidity, then the opposite components should be addressed to make sure that market cap is protected above a essential degree. If institutional promote strain forces costs down, then the market cap will fall. In flip, a decrease market cap might be extra prone to deter different gamers or, worse, pressure extra new entrants out of the markets solely.
At this level within the growth of the markets, the probabilities of this worst-case state of affairs coming to fruition have gotten vanishingly small. The eToroX report concludes that concern of lacking out is a big a part of what’s persevering with to drive establishments in direction of the house, making a constructive snowball impact in market cap and laying the foundations for sustainable liquidity. Even when one or two whales or institutional gamers determined to money out tomorrow, the market is changing into mature sufficient to climate the disruption.
There’s Nonetheless Work to Do
In fact, liquidity isn’t the one issue institutional buyers are searching for. A scarcity of regulatory certainty is one issue that’s nonetheless lacking. Lowering or eliminating safety dangers is one other. Nevertheless, the latter is changing into much less of an issue as respected custodians enter the market. And assuming that there’s sufficient alternative for positive aspects, ample depth of liquidity, and the concern of lacking out, regulatory uncertainty received’t be sufficient of a deterrent to getting into the markets.
So, the basics are in place. The cryptocurrency ecosystem wants to make sure it continues to cater to institutional buyers with the infrastructure they want. Doing so may even defend and nurture liquidity to some extent the place sudden, deadly crashes are now not a danger.
