A bunch of scandals sapped up liquidity in crypto markets last year. But even as prices have recovered in 2023, the so-called “Alameda Gap” has persisted, with liquidity still nowhere near levels notched before FTX collapsed.
Bitcoin market depth is “well below” levels seen in November, the month the now infamous exchange run by Sam Bankman-Fried went under. The quantity of Bitcoin and USDT bids and asks within 2% of the mid-price, as seen across 16 exchanges, hovered around 8,000 this month, about 40% less than in October, according to researcher Kaiko.
Plunges in liquidity usually come during periods of volatility as trading shops pull bids and asks from their order books to better regulate risks, Kaiko noted in November, when it first remarked on the phenomenon and dubbed it the “Alameda Gap.”
“It’s not just Alameda, although they were one of the biggest. Other market-makers took a hit and are being more cautious,” said Riyad Carey, research analyst at the company. “It really depends on the token, but I’d say there’s still a 20-40% gap from previous liquidity levels.”
“When there’s less liquidity, we tend to see that prices are more volatile in both directions, which has been the case in the past couple months,” Carey added.
The Alameda Gap has persisted into February, with #BTC market depth still well below November levels. The quantity of BTC-USD(T) bids and asks within 2% of the mid-price aggregated on 16 exchanges hovered around 8k BTC in February -- 40% less than in October pic.twitter.com/VyGIlVVjTm
— Kaiko (@KaikoData) February 24, 2023
FTX’s undoing was swift and spooked a lot of individual as well as institutional investors, with the price of Bitcoin touching a low of around $15,485 in November. It’s currently trading around $23,400, thanks to a year-to-date recovery of around 40%.
Analysts say that market makers fulfill an especially valuable role in the liquidity-sensitive crypto space by buying and selling coins. But as they turn more conservative in times of crisis, that results in thinner liquidity where users have greater difficulty buying or selling an asset, which in turn makes the market more volatile.
But others also agree that the ‘Alameda Gap’ phenomenon shouldn’t solely be attributed to Alameda, considering how many other firms have gone under over the past year. Strahinja Savic, head of data and analytics at FRNT Financial, also cites Three Arrows Capital, Celsius “and numerous other crypto funds, both well-known and not,” meaning that the drop-off in trading volumes at the end of last year can be tied back to the “elimination” of these companies.
“With these players out, it’s expected that we see an increase in certain inefficiencies in the crypto market,” he said. “These firms would have policed spreads, keeping them at bay, and supported market depth.”
Vetle Lunde, senior analyst at K33 Research, formerly known as Arcane Research, agrees that the market is far less liquid right now — and that it can’t all be attributed to Alameda. Cryptocurrency lender Genesis Global Holdco LLC filed for bankruptcy in January, having become another firm that collapsed in the aftermath of FTX’s downfall.
“This is not just Alameda though. It’s also the result of Genesis bankruptcy, and incurred losses for other market makers related to both Genesis and FTX,” Lunde said.
--With assistance from Eva Szalay.
This article was provided by Bloomberg News.