Bitcoin’s surge in value this month has drawn the attention of many, and the reasons behind the increase are not what one might expect. The world’s largest digital currency has experienced a notable increase of more than 12% since the start of June. Last Wednesday, it surpassed the $30,000 mark, reaching its highest point since mid-April, as confirmed by data from Coin Metrics.
While some attribute the recent increase to the announcement that BlackRock, a prominent asset management firm, had filed for a Bitcoin ETF that monitors the underlying asset’s market price, there is more to it than meets the eye. The significant movement can be attributed to a factor beyond the publicized developments surrounding the institutional adoption of bitcoin and other digital assets.
One crucial aspect impacting the market is the level of liquidity, specifically the market depth. Market depth is a market’s capacity to handle substantial sell and buy orders. When the market depth is low, even moderate sell or buy orders from major players can trigger major price movements in either direction.
According to Kaiko, a data firm specializing in cryptocurrencies, Bitcoin’s market depth has dropped by 20% since the start of this year. Among all cryptocurrencies, Bitcoin has been one of the hardest hit in terms of market depth, suffering from limited liquidity.
Regulatory scrutiny by the U.S. financial regulators has contributed to this lack of liquidity, with the SEC targeting major exchanges like Binance and Coinbase Global Inc. (NASDAQ: COIN). The diminished liquidity has also played a role in bitcoin’s impressive 80% rally year-to-date.
Moreover, another notable characteristic of the current crypto market is the low trading volumes observed on exchanges. According to CoinGecko, the daily trade volume for cryptocurrencies is currently at $24 billion. This figure represents a considerable drop from the pinnacle of the cryptocurrency boom in 2021 when Bitcoin was close to reaching its all-time high of about $69,000 and trading volumes were more than $100 billion.
Prior to the current Bitcoin cycle, institutional investors, especially investment banks such as Goldman Sachs and Morgan Stanley, were the main drivers of market momentum. These institutions set up trading desks to provide exposure to digital currencies.
However, it was when retail investors started to take notice, particularly in early 2021 when the phenomenon of NFTs emerged, that the market truly surged. Throughout that year, the crypto market experienced an unprecedented rally, with Bitcoin’s price soaring to new heights. CoinGecko data reveals that trading volume surged from $21.2 billion at the start of 2020 to $105.4 billion on November 9, 2021, coinciding with Bitcoin’s record-breaking peak.
Presently, trading volume is far from the levels observed during the height of the 2021 crypto boom.
Despite the current state of affairs, numerous insiders in the industry are hopeful that the market is approaching a period of stabilization where it can regain momentum and start to ascend once more.
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