Bitcoin liquidity, increased market volatility pose headwinds

Crypto volatility has reached its lowest point in years by the end of September, while liquidity remains concentrated in a few markets

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Stanslavs / Shutterstock, modified by Blockworks

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As the fourth quarter gets underway, the intricate dance of monetary policy, evolving liquidity patterns and inherent market volatility is set to define the crypto market’s narrative in the coming months, analysts say.

A marked decrease in crypto volatility throughout the third quarter, as highlighted in Kaiko’s Quarterly Market Report last week, suggests the asset class may either be reaching maturity or experiencing dampened activity, it said.

Crypto volatility consistently decreased in the last quarter, reaching its lowest point in years by the end of September. A slide in volatility has persisted since mid-2022 following the downfall of several major industry players including Terra, Celsius and Three Arrows Capital.

According to the latest Bitcoin Volatility Index figures, the asset’s 30-day estimate has dropped to levels not seen since March 2019 to 0.57%. The index quantifies the daily variation in bitcoin’s price compared to its initial value.

As a result, bitcoin’s (BTC) spot volume for the third quarter has declined to $6 billion, marking a consistent drop from $7 billion in Q2 and $13 billion in Q1.

Even the court’s decision regarding Grayscale at the end of August, which mandates the SEC to reevaluate Grayscale’s proposal and is thought to boost the chances of a BTC ETF spot approval, has failed to lead to notable price shifts.

The market also appears to be moving towards a greater concentration of liquidity, Kaiko highlighted.

Data shows that Binance now accounts for 30.7% of global market depth and an astonishing 64.3% of the total trade volume. This comes into sharper focus when noting that the top eight crypto exchanges hold more than 90% of the market depth and 89.5% of the trading volume.

“Liquidity concentration is a natural phenomenon that ultimately benefits individual traders, giving them better prices for their orders,” Kaiko said in its report. “However, because crypto markets by nature emphasize decentralization, liquidity concentration, especially on centralized exchanges, is worrying.”

In light of the asset class’ centralized connection, Bloomberg analyst Mike McGlone said last week the Federal Reserve’s implicit influence over bitcoin has largely been due to its nature as a round-the-clock leading indicator within the wider financial landscape. 

The observed liquidity redirection away from bitcoin suggests a potential correction ahead, McGlone said in a social media post.

“The bottom line for bitcoin at the start of 4Q may be that liquidity remains negative, with price implications,” McGlone posted. “Coming of age in a zero interest-rate world, the crypto hangover could be enduring as global rates continue to rise.”


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