Crypto’s liquidity crunch could allow event-based volatility to have a greater impact on prices, according to a recent analysis from Bitfinex.
Capital outflows in the crypto industry reached $55 billion in August, according to a report released by crypto exchange Bitfinex.
The analysis is based on the aggregate realized value metric, which measures the realized capital of Bitcoin (BTC) and Ether (ETH) with the combined supply from the top five stablecoins: Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI) and TrueUSD (TUSD). “A deep dive into the data reveals a prevailing trend: by early August, the industry had begun to experience capital outflows,” notes the report.
According to this metric, about $55 billion was drained from the crypto markets over the past month. Capital outflows did not just affect Bitcoin but also impacted Ether and stablecoin liquidity. Bitfinex said:
“August was the largest red monthly candle for BTC since the bear market bottom was formed in November 2022 at -11.29 percent as per Bitfinex Data.”
The analysis also points to the return of so-called event-based volatility, where isolated events can have a bigger impact on prices and overall market movements. In August, two isolated events had a significant impact on Bitcoin prices. On Aug. 17, a flash crash resulted in a sell-off of over 11.4% for BTC. Similarly, Grayscale’s partial legal victory over the Securities and Exchange Commission on Aug. 29 resulted in a 7.6% price jump within two hours.
“We believe that while volatility metrics continue to be low, the liquidity crunch in the market has allowed isolated events to have a bigger impact on market movements,” said Bitfnex.
Bitcoin open interest has outperformed the crypto markets due to increased institutional interest and wash trading on some exchanges, notes the analysis. Ether futures and options have declined significantly in 2023 when compared to previous years, to $14.3 billion per day, a steep decline of almost 50% from the two-year average.
The open interest of a particular contract, such as Bitcoin futures or options, represents the total number of open positions. This is a measure of how much money is currently invested in Bitcoin derivatives.
“The trajectory seen in the derivatives market, particularly in open interest across both futures and options, mirrors these patterns of low liquidity,” wrote Bitfinex.
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