Crypto Market Bounces Back to Pre-FTX Liquidity Levels

Kaiko's latest research bulletin highlights the cryptocurrency market's recovery to pre-collapse liquidity levels, driven by a significant Bitcoin rally and increased market depth.

In a comprehensive analysis, Kaiko, a leading cryptocurrency research firm, recently announced a significant recovery in the cryptocurrency market's liquidity. This rebound to pre-collapse levels marks a milestone in the industry's resilience, highlighting a resurgence in trading activity and investor confidence following the tumultuous downfall of FTX and Alameda Research in late 2022.

United States spot Bitcoin investment products have witnessed an unprecedented influx of capital, with a record $2.9 billion in new assets added over the past week, according to CoinShares. This surge in investment comes amidst fluctuating market prices, showcasing a strong investor demand for Bitcoin-focused financial products in a rapidly evolving digital asset landscape.

Revival of Crypto Market Liquidity: A Return to Stability Post-FTX Collapse

In an analysis released on Mar. 18, Kaiko, a premier cryptocurrency research firm, provided evidence of a remarkable recovery in the cryptocurrency market's liquidity. This turnaround marks a return to the stability levels last seen before the dramatic collapse of FTX and Alameda Research in November 2022. This resurgence in market liquidity shows the resilience of the cryptocurrency market and provides a nuanced understanding of the current landscape.

The Alameda Gap: A Turbulent Legacy

The term "Alameda Gap," introduced by Kaiko in the wake of the FTX downfall, encapsulates the significant reduction in market liquidity following the exit of major market makers. Alameda Research, alongside FTX, played a pivotal role in maintaining liquidity across global exchanges. Their sudden departure triggered a domino effect, leading to decreased trading volumes and heightened market instability. This period highlighted the fragility of the crypto market and the outsized influence of key players.

The Path to Recovery

For more than a year, the shadow of the "Alameda Gap" loomed over the cryptocurrency market. Market makers, essential for the smooth operation of trading activities, adopted a cautious stance, contributing to the liquidity shortage. This cautious approach was motivated by a desire to wait for an upturn in market sentiment and trading volumes before re-engaging actively.

The Turning Point: Bitcoin's Rally and Market Depth

The catalyst for change emerged from a recent rally in Bitcoin prices, which saw a 60% increase since the beginning of the year, culminating in a new all-time high of $73,750 on Mar. 14. Kaiko's research highlights a significant 40% year-to-date increase in Bitcoin's 2% market depth, a key liquidity metric. This metric not only rebounded but briefly exceeded its pre-FTX average, signaling a near-complete liquidity recovery. The return of market depth to pre-collapse levels is a clear indicator of the market's resilience and the re-engagement of market makers.

The Role of Major Exchanges

The research further points to improved liquidity conditions on leading U.S. exchanges such as Coinbase, Kraken, and Bitstamp. The narrowing of BTC/USD spreads on these platforms suggests that liquidity is significantly enhancing, thereby reducing the cost of trading. While structural adjustments contribute to this positive development, the overarching trend indicates a healthier, more stable market environment.

ETF Inflows: A Mixed Signal

Despite these positive developments, Kaiko's bulletin also notes a recent deceleration in daily Exchange-Traded Fund (ETF) inflows, which have fallen below $200 million after previously reaching highs above $500 million and a record $1 billion daily inflow. This slowdown, occurring in the wake of Bitcoin's all-time high, introduces a note of caution amidst the optimism, highlighting the market's dynamic nature and the variability of investor sentiment.

The recovery of market liquidity to pre-FTX levels is a milestone for the cryptocurrency industry, reflecting its capacity to overcome challenges and adapt to changing conditions. The resilience demonstrated by the market in bouncing back from the liquidity crisis instigated by the FTX collapse is a positive indicator of its maturity and stability. As the cryptocurrency market continues to evolve, the importance of robust market makers and the impact of market sentiment on liquidity will remain central themes. The industry's ability to navigate these challenges will be crucial in shaping its future trajectory and ensuring its long-term viability.

Unprecedented Inflows into US Bitcoin Investment Products Set New Records

In an unprecedented surge of investor interest, United States-based Bitcoin investment products have experienced a record-breaking week of inflows, with $2.9 billion of new assets added. This remarkable achievement was highlighted in a Mar. 18 report by CoinShares, a prominent digital asset investment firm, revealing that a staggering $13.2 billion in new capital has flowed into such investment vehicles year-to-date. This influx has propelled the total value of Bitcoin under custody in these products to $74.61 billion, with Bitcoin-centric offerings accounting for a whopping 97% of the total inflows.

A Week of Record-Breaking Inflows

CoinShares analyst James Butterfill noted the extraordinary nature of these inflows, stating, "Digital asset investment products saw record weekly inflows totaling US$2.9bn, beating the prior week’s all-time record of US$2.7bn." This surge in investment is a strong indication of the growing confidence and interest in Bitcoin as a leading asset within the digital currency space.

Bitcoin Dominates Amidst a Tumble in Price

Despite the overall enthusiasm for Bitcoin investment products, the cryptocurrency itself has faced a 7% decrease in its value over the past week, trading at $67,418 at the time of the report's publication. This decline in price, juxtaposed with the high level of investment inflow, underscores the volatile nature of cryptocurrency markets and investor resilience and belief in Bitcoin's long-term potential.

Ether and Altcoins Lag Behind

The CoinShares report also pointed out a contrasting trend for Ether and other altcoins, which have seen a fraction of the inflows compared to their Bitcoin counterparts. This discrepancy signals a clear investor preference for Bitcoin over other cryptocurrencies, at least within the context of the current market dynamics.

Shifting Trends: From Global to US Products

An interesting shift has been observed in the global cryptocurrency investment landscape. According to the report, there have been significant outflows from Bitcoin exchange-traded products on German, Canadian, and Swedish exchanges, amounting to $738 million. Many investors are reallocating these funds to their U.S. equivalents, which offer more attractive fee structures. U.S. Bitcoin ETFs, some charging as little as 0% on a portion of their inflows, have rapidly gained popularity since their approval by the Securities and Exchange Commission (SEC) in January. Consequently, these U.S. offerings now command over 80% of the spot Bitcoin ETF market share.

Regulatory Responses and Global Perspectives

The burgeoning popularity of Bitcoin ETFs has not gone unnoticed by regulators worldwide. The United Kingdom's Financial Conduct Authority (FCA) and Hong Kong's Securities and Futures Commission (SFC) have both shown a willingness to adapt to the evolving market. The FCA recently indicated it would not oppose the creation of a UK-listed market segment for cryptoasset-backed Exchange Traded Notes, marking a significant shift in regulatory posture. Similarly, Hong Kong's SFC received its first spot Bitcoin ETF application on Jan. 29, signaling an opening for such products in Asian markets.

The record inflows into US Bitcoin investment products represent a significant milestone in the cryptocurrency market's development. As investor interest continues to grow and regulatory bodies adjust their stances, the landscape for Bitcoin and other digital assets is set to evolve further. The current trends underscore the dominant position of Bitcoin within the investment sphere and hint at a future where cryptocurrencies play an increasingly central role in global finance.