Poor liquidity, a problem that has plagued crypto markets since FTX collapsed in November, could worsen and fuel price volatility as regulators stalk dominant exchange Binance.
On Monday, the US Commodity Futures Trading Commission (CFTC) sued Binance for running an alleged “illegal exchange” and “sham” compliance program. The regulator responsible for overseeing commodities and derivatives markets, including derivatives linked to Bitcoin (BTC), sued Binance CEO Changpeng Zhao and former top compliance executive Samuel Lim for “willful circumvention” of US law .
Binance has long been the leading exchange for digital assets and has had a much larger share of global trading volume than its former rival FTX. The exchange accounted for 81% of all BTC traded on centralized exchanges as of February, according to Morgan Stanley. According to the case documentA single trader from Chicago is responsible for 12% of all trading volume on Binance.
As a result, observers fear the lawsuit would entail a deeper drop in market liquidity – a measure of how difficult or easy it is to trade large volumes at stable prices.
“The main concern is what this will do for market liquidity in the short term – if market makers step back from trading on Binance now and if Binance’s US-based trading desks have to shut down operations, it will reduce liquidity in an already thin market. said Noelle Acheson, the author of the popular Crypto is Macro Now newsletter.
“That will add to volatility and could keep some big players on the sidelines for a while longer,” Acheson added.
Liquidity is commonly measured by a metric called 2% Depth of Market – a collection of buy and sell orders within 2% of the mid price, or average of the bid and ask/ask prices.
The greater the depth of market, the less likely it is that large buy/sell orders will result in significant deviations in the asset’s market price. Market makers are companies that provide liquidity to a financial market by creating buy and sell orders that are not executed immediately.
Bitcoin’s 2% market depth slipped to a 10-month low last week, extending the deterioration seen since Alameda Research, the sister firm of FTX, formerly one of the largest market makers, closed shop five months ago.
According to DRW subsidiary Cumberland, one of the earliest and oldest crypto market makers, the situation will continue for a while.
“This lawsuit will certainly add to the tightness in the already strained digital asset banking system and damage liquidity as a result,” Cumberland said in a tweet Explanation of the impact of the regulatory measures on the market.
Some observers expect bitcoin to revisit former resistance-turned-support near $25,000 amid heightened regulatory uncertainty.
“It is clear that the CFTC wants oversight of all crypto exchanges. It’s nothing new, but the market is reacting cautiously and we’re still holding our breath for more negative news that could push BTC lower,” Kssis told CoinDesk.
Long rects [liquidations]that rose yesterday will inevitably push prices lower, possibly below the support near $25,000,” added Kssis.
Bitcoin fell over 3% on Monday, hitting lows near $26,500 in response to CFTC actions against Binance. The cryptocurrency has since stabilized around $27,000 after hitting a nine-month high of $28,889 on March 23, data from CoinDesk shows.
Derivatives exchanges liquidated or closed more than $25 million worth of bullish long futures positions on Monday, a sharp increase from Sunday’s $3.6 million, according to Glassnode. Meanwhile, short-term liquidations totaled just $7 million. Forced closures of long/short positions often contribute to bearish/bullish pressures around the cryptocurrency.
According to Acheson, the lawsuit is not good news for market valuations as it “adds another layer of uncertainty and does not bode well for the ecosystem ‘looking’ just after another high-profile scam.”
However, Acheson expects recent macroeconomic developments, such as heightened expectations for a quick Fed pivot in favor of rate cuts, to cushion markets from the negative impact of the Binance news.
“For BTC, ETH and other majors, we are seeing some selling interest supported by buyers – this is a very different market from November, with a turning point in sight and new narratives motivating new types of investment decisions,” Acheson noted . “Psychologically, it’s not as big a hit as the FTX implosion as the market has been repeatedly warned that something like this is coming.”