While Bitcoin’s price has recovered since its March lows, topping out near $28,900, the crisis that caused the initial dip still poses concerns for the market.

The closure of Silvergate’s SEN and Signature’s Signet network in early March has exposed the crypto market to low liquidity risks.

“Liquidity is king,” an adage in trading circles, is an apt way to describe its importance. It describes a market’s ability to facilitate conversion between an asset to fiat currency.

Poor liquidity around an asset leads to market inefficiencies where traders lose money due to events like thin order books, slippage, and larger spreads. It can also cause serious volatility and deter sophisticated investors from placing trades.

Kaiko’s head of research Clara Medalie told Decrypt that the current situation is “pretty dangerous” and could manifest in massive price volatility in both directions.

“A drop in liquidity certainly helps traders to the upside, but there is always eventually a downside,” said Medalie. “The moment buy pressure subsides, anything can happen to price.”

Crypto’s liquidity crisis

The liquidity crisis first manifested with a $200 million drop in 1% market depth after Silvergate’s SEN network was closed, as identified in Kaiko’s latest research
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Author: Liam J. Kelly,Nivesh Rustgi

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