Crypto Traders Fear Huge Price Swings as Bitcoin and Ether's Liquidity Drops

Traders in the crypto market are worried of a potential rollercoaster in prices as liquidity in the bitcoin (BTC) and ether (ETH) markets continue to worsen. Liquidity refers to the ability of the market to absorb large buy and sell orders at stable prices, with deeper depth corresponding to greater liquidity.

Data from crypto data provider Kaiko have shown liquidity levels have dropped significantly since October, with BTC's 2% market depth having recently reached its lowest level since May 2022 following the Terra collapse, while ETH's 2% market depth has more than halved since October. This has caused fund traders to use the Time Weighted Average Price (TWAP) strategy over longer periods of days or weeks to minimise the impact on the market.

At the same time, Bitcoin's Volatility Index (BVIN) and seven-day Variance Risk Premium (VRP) have also dropped, which could lead to sudden eruptions of volatility.

According to Matthew Dibb, Chief Investment Officer for Astronaut Capital, 'the amount of slippage associated' with the dwindling liquidity has meant that 'most large funds have not been participating at the same level as previous'. Any large institution offloading coins now could have a greater than usual effect on the market.

The liquidity began drying up in mid-November after Alameda Research and FTX went bust, resulting in other market makers scaling back or ceasing their activity to reduce risk, whereas traders have moved to De-centralised exchanges to avoid counterparty risk.

Key Points

  • Traders are worried of potential abrupt price swings in the crypto market.
  • BTC's 2% market depth has recovered to 6,800 BTC, the lowest since May 2022.
  • ETH's 2% market depth has been halved since October.
  • Bitcoin's Volatility Index (BVIN) and 7-day Variance Risk Premium (VRP) have also dropped.
  • Alameda Research and FTX's collapse have caused traders to move to De-centralised exchanges.


Traders in the crypto market are worried of potential huge price swings as liquidity levels drop and indicators like Bitcoin's Volatility Index and 7-day Variance Risk Premium decline. This has caused funds to move to De-centralised exchanges to minimise counterparty risk.