Is Bitcoin Rally on Low Liquidity Sustainable?
Bitcoin has roared back to life, going by the 25% plus rally in October. The rally came after a long period of consolidation that saw the flagship cryptocurrency struggle to power through the critical $30,000 a coin level. Amid the recent blockbuster move, there are growing concerns about whether the rally is sustainable.
Bitcoin Liquidity Debacle
Unlike when Bitcoin exploded, supported by high liquidity, that appears not to be the case this time. The recent swings of more than 10% have come at the back of scarcity in liquidity, which is a point of concern if the crypto is to have any chance of powering to the $40,000 a coin level, let alone its all-time highs of $68,000.
Market depth is at its all-time lows, and institutional investors who had turned to crypto in the yesteryear have shunned it. In the spot market, the trading volumes across centralized and decentralized exchanges are at multi-year lows.
On the other hand, the total market capitalization for stablecoins has also been on the downtrend, shrinking significantly over the past few months. The decline should be a concern given that stablecoins market capitalization is often used to measure the health of liquidity in the crypto market.
Shrinking liquidity in the cryptocurrency sector could be attributed to institutional investors finding better investment options. The high-interest rate environment triggered by the US Federal Reserve’s aggressive interest rate hikes has made yields more attractive. Consequently, many investors pack their funds in assets that benefit from high-interest-rate environments like bonds and treasuries.
Bitcoin rallied to record highs of $68,000 a coin as it attracted strong bids from Tesla and Grayscale Investment holdings. In recent years, institutional investors have remained cautious about taking a position in the cryptocurrency.
The drop in liquidity came against the backdrop of the collapse of the FTX exchange, which rattled investor sentiments about cryptocurrencies. With the collapse, many investors started questioning the viability of the entire crypto asset class, going by the massive losses that came into being following the meltdown at FTX.
On the other hand, resurgence in Bitcoin trading activity in recent weeks has come on expectations of a Bitcoin exchange-traded fund. A Bitcoin exchange-traded fund could be the missing link in drawing more institutional investors into the fledgling flagship cryptocurrency. Such a product would only affirm its credibility in the mainstream sector.
Mid-last month, Bitcoin rallied by more than 16% daily as reports hit the wires, signaling that the US was on course to approve the much-awaited ETF. The crypto gave back most of the gains as BlackRock, one of the largest asset managers in the world, indicated its application for a Bitcoin ETF with the US Securities and Exchange Commission was yet to gain approval.
Nevertheless, Bitcoin regained its footing in the market, rallying to highs of $35,000 a coin after a ticker for a proposed BlackRock ETF fund was revealed. Since Bitcoin has exploded on the expectation of an ETF, the crypto could come down tumbling if no such product materializes in the coming weeks.