Bitcoin Surges as Selling Pressure Decreases
Bitcoin has experienced a sharp increase this month, but not for the reasons you might think. The world's largest digital currency has risen by over 12% since the beginning of June. According to Coin Metrics data, its price surpassed $30,000 on Wednesday, reaching its highest level since April 14.
Market players attributed the surge to the news of BlackRock, the largest US asset management firm, applying to establish a Bitcoin exchange-traded fund (ETF). However, there might be another factor beyond the news flow.
Shallow Liquidity and the Departure of Major Players
The crypto market depth has been sitting at very low levels this year. Market depth refers to a market's ability to absorb relatively large buy and sell orders with small price movements. When market depth is low and major players place orders to buy or sell digital assets, prices can move significantly, even if the orders are not that large. Market depth is a measure of liquidity in a market.
According to data firm Kaiko, Bitcoin's market depth has dropped by 20% since the beginning of the year. Kaiko stated that Bitcoin is one of the cryptocurrencies most affected by market depth.
Jamie Sly, the research director at CCData, stated in an email to CNBC, "The recent price increase in Bitcoin is largely due to large transactions in a less liquid market." Sly added, "Our analysis of market orders above 5 BTC reveals an aggressive increase in buying, indicating that large players are trying to increase their positions in digital assets. When large orders combine with shallow depth, the market becomes more volatile."
This lack of liquidity is partly due to the US authorities' efforts to register and regulate the crypto industry. The US Securities and Exchange Commission has filed lawsuits against major exchanges like Coinbase and Binance.
The low liquidity, a characteristic of the crypto market throughout the year, is partially responsible for Bitcoin's 80% rally since the beginning of the year.
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| BTCUSD Liquidity Map, source: DecenTrader |
Retail Buyers Have Yet to Return
Another notable feature of the current crypto market is low trading volumes on exchanges.
According to crypto data website CoinGecko, the daily trading volume in the crypto market is currently around $24 billion.
During the peak of the 2021 crypto rally when Bitcoin approached its all-time high of nearly $69,000, the trading volume exceeded $100 billion.
Large crypto investors are hoping that price increases alone will be enough to encourage retail investors to join the rally, but that hasn't been the case.
Clara Medalie, Research Director at Kaiko, said, "What's notable about this rally is that overall trading volumes are at some of the lowest levels in years, and we're only seeing a slight increase within the context of the 2023 rally. This increase is even lower than the levels we saw from January to March."
"I believe that trading volumes and price volatility are two of the most meaningful indicators of crypto market activity. Both volatility and volumes are at their lowest levels in the past few years, and even a rapid price increase is not sufficient to attract individuals."
"Not a Market for Ordinary Customers"
During the last Bitcoin cycle, when investment banks like Morgan Stanley and Goldman Sachs set up units to allow their clients to trade digital currencies, the market momentum was largely driven by big institutional names.
However, the market truly took off when individual investors started showing interest in the assets. In early 2021, people began to take a serious interest in non-fungible tokens (NFTs), money-like tokens that are not interchangeable, and other more speculative crypto derivatives.
Later that year, the crypto market witnessed an extraordinary rally as the price of Bitcoin reached unprecedented levels. According to CoinGecko, trading volume increased from $21.2 billion at the beginning of 2020 to $105.
