The risk of trading cryptos has never been higher as exchange liquidity dries up. This means that there is less money available to buy and sell cryptos, which can make it more difficult to get in and out of positions.
There are a few reasons why exchange liquidity is drying up. One reason is that the crypto market is in a bear market. This means that prices are falling, and investors are selling their cryptos. This selling pressure is causing the market to become more illiquid.
Another reason for the decline in exchange liquidity is that regulators are cracking down on crypto exchanges. This is making it more difficult for exchanges to operate, and it is also making them more hesitant to offer liquidity.
The decline in exchange liquidity is a major risk for crypto traders. It means that they may not be able to get in and out of positions as easily, and it also means that they may have to pay higher prices to buy cryptos and lower prices to sell them.
If you are considering trading cryptos, it is important to be aware of the risks involved. The decline in exchange liquidity is just one of the risks that you need to consider.
Here are some tips for trading cryptos in a low-liquidity environment:
- Use limit orders instead of market orders. Limit orders will only execute if the price reaches your specified limit, which can help you to avoid paying too much or too little for cryptos.
- Be patient. It may take longer to get in and out of positions in a low-liquidity environment.
- Use a variety of exchanges. This will give you more options if one exchange is not liquid.
- Do your research. Before you trade any crypto, make sure that you understand the risks involved.
Bitcoin Exchange Reserves Nears Two Million BTC
Moreover, the global liquidity of Bitcoin has fallen by over $10 million in the second quarter of 2023.
This is a worrisome trend compounded by the decision of significant market makers Jane Street and Jump to wind down their liquidity operations in the US.
Ki Young Ju, CEO at CryptoQuant, maintains that the liquidity crisis cryptocurrency exchanges are undergoing is even more notorious when looking at the sell-side and buy-side liquidity of the two largest cryptocurrencies by market cap and all major stablecoins.
“Crypto sell-side liquidity [is] declining, but buy-side liquidity experiencing even sharper decline. BTC exchange reserve down 20% in a year, ETH down 40%, stablecoins down 52%,” said Ju.
This diminishing liquidity poses significant risks to traders. Low liquidity allows market manipulators to exploit asset prices, causing fluctuations that enable “pump and dump” schemes.
Traders also face “slippage,” where the difference between the intended and actual execution prices of assets can result in unexpected losses. Finally, crypto traders may struggle to exit positions due to a lack of counterparties on low-liquidity exchanges.
Risk Management Is Key
However, it is not all doom and gloom. Traders can take several steps to mitigate the dangers of low liquidity. Trading on exchanges with high trading volumes and narrow spreads can offer more stability.
Monitoring market depth and order books can help crypto traders to gauge liquidity levels, while using limit orders instead of market orders can minimize slippage. Lastly, diversifying trading activities across multiple crypto exchanges can help avoid overexposure to a single platform.
Read more: How to Choose The Right Crypto Exchange
While the trading landscape has undoubtedly become riskier due to falling crypto liquidity, these challenges are not insurmountable. Traders must stay informed, use reliable platforms, and employ smart trading strategies to navigate the current uncertainty in the crypto market.