The cryptocurrency market has been on a roller coaster ride for the past few months. After reaching record-breaking highs in December 2017, Bitcoin, the leading cryptocurrency by market capitalization, crashed and has struggled to regain its footing since. This has left many investors worried about the future of cryptocurrencies and its long-term prospects. Moreover, with Bitcoin’s liquidity quickly drying up, the cryptoverse has been thrown into a state of uncertainty as investors and traders alike ponder on how this will impact the evolution of the digital asset market.
Understanding Liquidity
Liquidity or illiquidity is a key measure used by investors to gauge the health of a particular asset. By definition, liquidity can be described as the ease at which an asset can be bought or sold in the market without causing its price to significantly change. An asset with high liquidity would provide buyers and sellers with the peace of mind of being able to quickly enter and exit their positions in the market, which is especially crucial for those investing on margin or leveraging their investments.
On the other hand, an illiquid asset typically has thin volumes, where buyers and sellers, who are often few and far between, are unable to enter or exit the market quickly. For those unfamiliar with investing and trading, it remains important to note that high volumes are essential for asset prices to remain stable and for buyers and sellers to have confidence in their investments.
Bitcoin’s Liquidity – An Alarming Trend
As inquisitive minds began to take a closer look into Bitcoin’s liquidity, they were greeted by disconcerting trends. The leading digital asset, Bitcoin had been gradually losing its liquidity since late 2017, right when its price was at its peak. In fact, the figure presented by CoinAPI, a provider of historical and real-time crypto market data, shows the diminishing liquidity of Bitcoin with regards to its 24-hour volume.
The chart below illustrates how liquid or illiquid the asset is, by displaying Bitcoin’s daily volume (USD million) from May 2018 to June 2018.
As seen from the chart, the daily transaction volume for Bitcoin had plummeted from approximately over USD 3,400 million (May 21, 2018) to USD 2,400 million (June 4, 2018). This is a worrying figure, as it shows that the leading cryptocurrency had dropped more than thirty percent in volume in just a fortnight.
Liquidity Inevitably Influences Bitcoin’s Performance
In the cryptoverse, liquidity holds major implications. The diluted liquidity makes it difficult for investors and traders to enter, whilst also making it arduous to exit the market. This is especially concerning as investors who leverage their money often require quick access and exit to the market in order to maximize their profits. Moreover, this liquidity scarcity has also negatively impacted Bitcoin’s performance against other cryptocurrencies.
For instance, Ethereum, the second largest cryptocurrency by market capitalization and whom is often referred to as Bitcoin’s closest rival, had seen its market capitalization grow significantly since late May, while Bitcoin’s had been on a continuous downwards trend. This is likely due to Ethereum being better positioned as far as liquidity is concerned, and thus attracting more investments from the cryptoverse.
Future Uncertainty – What Does the Cryptoverse Expect?
Given the recent market turbulence, many market participants fear that the worst may not be over for Bitcoin, with its allies seemingly unable to lend a helping hand. Therefore, the cryptoverse is faced with the challenge to assess the future of Bitcoin, and the digital asset market as a whole.
Some analysts have opined that Bitcoin’s liquidity will revive once its volatility decreases, as investors will flock back to the market in search of larger gains and more liquidity. On the other hand, some most bearish analysts are foretelling a bleak future for the leading digital asset, with it potentially dropping further in the coming weeks or months.
The blockchain community’s consensus is that the cryptoverse is in a slump and that investments need to be made with caution. In the end though, it is hoped that Bitcoin’s liquidity will soon be restored, or otherwise its future may remain to be seen.
The evolution of cryptocurrencies remains one of speculation, uncertainty and risk. As with any other asset, market liquidity for cryptocurrencies are linked its performance and to the performance of the market as a whole. For Bitcoin, the recent trend is worrying, with its liquidity rapidly decreasing as investors have opted to invest in alternative digital assets instead.
These concerns have filled the cryptoverse with a state of unease, as no one is certain of what lies ahead. Despite the headwinds, market experts remain hopeful that Bitcoin’s liquidity will soon be restored to see the asset make a full recovery. It remains to be seen, but one thing is for certain, every individual in the cryptoverse needs to tread carefully.
