Crypto Global Bid and Ask Metric Plunges 20% Over Weekend, Indicating Extremely Low Liquidity Levels
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Over the weekend, the crypto market liquidity took a significant plunge, resulting in extremely thin order books that have the potential to magnify price fluctuations.
On Saturday, Hyblock Capital, a leading crypto research firm, observed a significant 20% decline in the aggregated dollar value of resting bid and ask orders across spot markets for more than 1,100 coins listed worldwide.
The sudden drop occurred when alternative cryptocurrencies such as SOL, MATIC, DOGE, and others experienced a significant crash due to speculations about a fund liquidating its coin investments.
According to Joe McCann, the Chief Investment Officer of crypto hedge fund Assymetric, the altcoin crash led to a significant decrease in the number of resting bid and ask orders, possibly due to market makers withdrawing from the market.
"The @hyblockcapital Global Bid/Ask metric dropped a full 20% during the collapse. Seems like a bunch of MMs [market makers] pulled inventory creating paper-thin order books," McCann tweeted. Other observers argued that the decline in liquidity stemmed from a single market maker running out of collateral.
Low liquidity can pose challenges for traders when it comes to executing large orders at stable prices. Additionally, it amplifies the impact of multiple small orders on the prevailing market rate.
The order book displays all open orders and quotes for a specific financial instrument, submitted by market makers and other participants in the market. The bid represents the maximum price that a user is willing to pay to purchase the instrument, while the ask or offer represents the minimum price at which someone is willing to sell the instrument. A resting order refers to a limit order placed to buy the instrument at a price lower than the current market rate or sell it at a price higher than the current market rate.
Market makers play a crucial role in the financial market by generating bid and ask orders and ensuring liquidity in the order book.
The dollar amount of the number of resting bid and ask orders waiting to be filled crashed by 20% on Saturday. (Hyblock Capital)
During Saturday's Asian hours, the dollar amount of resting bid orders, represented by the green line, and resting ask orders, represented by the red line, both experienced a significant decline of over 20%, falling below $500 million.
The decrease in liquidity suggests that the market may experience higher-than-average volatility following the release of U.S. inflation data and the Federal Reserve's rate decision. The U.S. consumer price index is set to be published on Tuesday at 12:30 UTC, while the Fed is anticipated to maintain the current policy rates on Wednesday at 18:00 UTC, according to Reuters data from FXStreet.
