Opinion by: Arthur Azizov, Founder and Investor at B2 Ventures
Regardless of its decentralized nature and massive guarantees, cryptocurrency continues to be a forex. Like all currencies, it can not escape the realities of as we speak’s market dynamics.
Because the crypto market develops, it begins mirroring the life cycle of conventional monetary instruments. The phantasm of liquidity is among the most urgent and, surprisingly, much less addressed points that stem from the market’s evolution.
The worldwide cryptocurrency market was valued at $2.49 trillion in 2024 and is predicted to greater than double to $5.73 trillion by 2033, rising at a compound annual progress price of 9.7% over the following decade.
Beneath this progress, nonetheless, lies a fragility. Just like the FX and bond markets, crypto is now difficult phantom liquidity: Order books that look strong throughout calm durations rapidly skinny out throughout the storm.
The phantasm of liquidity
With over $7.5 trillion in every day buying and selling quantity, the overseas trade market has traditionally been perceived as essentially the most liquid. But, even this market now exhibits indicators of fragility.
Some monetary establishments and merchants concern the market’s depth phantasm, and common slippages on even essentially the most liquid FX pairs, like EUR/USD, have gotten extra tangible. Not a single financial institution or market maker is able to face the danger of holding risky belongings throughout a sell-off — the so-called warehouse danger post-2008.
In 2018, Morgan Stanley famous a profound shift in the place liquidity dangers reside. After the monetary disaster, capital necessities pushed banks out of liquidity provision. Dangers didn’t disappear. They simply went to asset managers, ETFs and algorithmic methods. There was a growth of passive funds and exchange-traded automobiles again within the day.
In 2007, index-style funds held simply 4% of the MSCI World free float. By 2018, that determine had tripled to 12%, with concentrations as much as 25% in particular names. This case exhibits a structural mismatch — liquid wrappers containing illiquid belongings.
ETFs and passive funds promised straightforward entry and exit, however the belongings they held, company bonds specifically, couldn’t all the time meet expectations when markets turned risky. Throughout drastic value fluctuations, ETFs are sometimes bought extra intensively than underlying belongings. Market makers demanded wider spreads or refused to enter, unwilling to carry belongings via turmoil.
This phenomenon, first noticed in conventional finance, is now taking part in out with familiarity in crypto. Liquidity could seem strong solely on paper. Onchain exercise, token volumes and order books on centralized exchanges all point out a wholesome market. However when sentiment sours, the depth disappears.
Crypto’s liquidity phantasm is lastly coming to gentle
The phantasm of liquidity in crypto isn’t a novel phenomenon. Throughout the 2022 crypto downturn, main tokens skilled substantial slippage and widening spreads, even on prime exchanges.
The latest crash of Mantra’s OM token is one other reminder — when sentiment modifications, bids vanish, and value help evaporates. What at first seems to be like a deep market in calm circumstances can immediately collapse underneath stress.
This occurs primarily as a result of crypto’s infrastructure stays extremely fractured. Not like equities or FX markets, crypto liquidity is scattered throughout many exchanges, every with its personal order ebook and market makers.
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This fragmentation is much more tangible for Tier 2 tokens — these exterior the highest 20 by market cap. These belongings are listed throughout exchanges with out unified pricing or liquidity help, counting on market makers with totally different mandates. So, liquidity exists however with out significant depth or cohesion.
The issue worsens with opportunistic actors, market makers and token initiatives, who create an phantasm of exercise with out contributing to actual liquidity. Spoofing, wash buying and selling and inflated volumes are widespread, particularly on small exchanges.
Some initiatives even stimulate a man-made market depth to draw listings or to appear extra respectable. When volatility hits, nonetheless, these gamers pull again immediately, leaving retail merchants toe-to-toe with a value collapse. Liquidity is not simply fragile, it is merely faux.
The answer to the liquidity drawback
Integration on the base protocol degree is required to cope with liquidity fragmentation in crypto. This implies embedding crosschain bridging and routing features instantly into the blockchain’s core infrastructure.
This strategy, now actively embraced by choose layer-1 protocols, treats asset motion not as an afterthought however as a foundational design precept. This mechanism helps to unify liquidity swimming pools, scale back market fragmentation and guarantee easy capital stream throughout the market.
Moreover, the underlying infrastructure has already come a good distance. Execution speeds that when took 200 milliseconds at the moment are all the way down to 10 or 20. Amazon and Google’s cloud ecosystems, having P2P messaging between clusters, allow trades to be processed solely within the community.
This efficiency layer is now not a bottleneck — it is a launchpad. It empowers market makers and buying and selling bots to function seamlessly, particularly since 70% to 90% of stablecoin transaction volumes, which is a serious section of the crypto market, now comes from automated buying and selling.
Higher plumbing alone, nonetheless, is not sufficient. These outcomes ought to be paired with sensible interoperability on the protocol degree and unified liquidity routing. In any other case, we’ll proceed constructing high-speed methods on the fragmented floor. Nonetheless, the inspiration is already there and eventually robust sufficient to help one thing larger.
Opinion by: Arthur Azizov, Founder and Investor at B2 Ventures.
This text is for normal data functions and isn’t meant to be and shouldn’t be taken as authorized or funding recommendation. The views, ideas, and opinions expressed listed here are the creator’s alone and don’t essentially mirror or characterize the views and opinions of Cointelegraph.
