Crypto liquidity crisis causes major price slippages during sell-offs – Kaiko

Crypto markets continue to grapple with liquidity fragmentation, leading to persistent price discrepancies across exchanges.

According to a recent Kaiko report, these disparities are diminishing over time, but they remain prominent on smaller, less liquid exchanges, especially during market events like the recent sell-off seen last week.

Price slippage occurs when the expected price of a market order differs from the execution price and is a key liquidity indicator.

During the sell-off on Aug. 5, Kaiko calculated that most exchanges showed an increased slippage in their Bitcoin (BTC) orders of $100,000. Notably, the spike was much more pronounced on some exchanges and trading pairs.

Zaif’s BTC-JPY pair experienced the highest slippage, while KuCoin’s BTC-EUR pair exceeded 5%. Meanwhile, typically liquid stablecoin-quoted pairs on BitMEX and Binance US also saw notable increases.

The report also highlighted that the impact on liquidity can vary not only across exchanges but also among trading pairs within the same exchange. It added:

“For instance, Coinbase’s BTC-EUR pair is notably less liquid than its BTC-USD pair. This discrepancy can lead to extreme volatility during heightened market activity, as seen in March when prices of Coinbase’s BTC-EUR diverged significantly from the broader market and market depth plummeted.”

Moreover, BTC prices on Binance.US diverged significantly from more liquid platforms, as the platform faces reduced liquidity following the SEC’s June 2023 lawsuit. Binance.US currently processes only $20 million in daily trade volume, down from $400 million in early 2023.

Liquidity concentration has also intensified during weekdays, particularly in BTC-USD markets, following the launch of spot Bitcoin exchange-traded funds (ETFs) in the US. This trend amplifies the risk of sharp weekend price swings during market stress.

Despite these challenges, crypto platforms have invested heavily in infrastructure, enabling them to handle increased trade volumes without outages. During the recent sell-off, BTC-USD and BTC-USDT trade counts hit record highs on Bybit and reached post-FTX collapse levels on Coinbase.