The cryptocurrency market has witnessed a significant recovery in liquidity, with levels almost fully rebounding to pre-collapse levels following the shutdown of FTX and Alameda Research in November 2022. According to a recent report by crypto research firm Kaiko, the liquidity gap, known as the “Alameda Gap,” has now vanished, thanks in part to the recent surge in Bitcoin's price.
Kaiko introduced the term “Alameda Gap” in November 2022 to describe the drop in market liquidity caused by substantial losses incurred by market makers, including Alameda Research. This collapse led to a decline in available trading liquidity, affecting volumes and market stability, and underscored the impact of major players in the crypto markets.
The gap persisted for over a year as market makers waited for sentiment and trading activity to recover. However, as of last week, Bitcoin's 2% market depth has increased by 40% year-to-date, surpassing its pre-FTX average of $470 million.
The surge in Bitcoin's price, which has risen by 60% since the beginning of the year and reached a new all-time high of $73,750 on March 14, has played a significant role in this recovery. Additionally, BTC/USD spreads on major U.S. exchanges like Coinbase, Kraken, and Bitstamp have declined, indicating improved liquidity conditions.
The decrease in spreads could be due to structural reasons, but it suggests that trading costs in the U.S. have become more affordable. This improvement in liquidity comes at a time when Bitcoin could face a “sell-side liquidity crisis” if institutional ETF inflows continue to slow down, as seen in recent days.
With the crypto market depth almost fully recovered, the industry is witnessing a resurgence in liquidity and market stability, marking a positive turn for the cryptocurrency ecosystem.
