Market liquidity, which experienced a significant decrease following the shutdown of FTX and Alameda Research in November 2022, has now recovered to its previous levels, according to a report from crypto research firm Kaiko. The firm’s data shows that the liquidity gap, known as the “Alameda Gap,” rebounded to pre-FTX levels last week, thanks in part to a recent Bitcoin rally.
The term “Alameda Gap” was coined by Kaiko in November 2022 due to its role as a major market maker. It refers to a drop in liquidity on global exchanges caused by substantial losses incurred by market makers. This collapse resulted in a significant decline in available trading liquidity, impacting trading volumes and market stability, and highlighting the influence of key players in the crypto market in 2022.
In its recent bulletin, Kaiko acknowledged that 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 market depth, which represents the ability to absorb large buy or sell orders without significantly impacting the price, has increased by 40% year-to-date. It briefly surpassed its pre-FTX average of $470 million, indicating a nearly full recovery.
Kaiko attributed this recovery to the surge in BTC prices, which have risen by 60% since the start of the year and reached a new all-time high of $73,750 on March 14. Additionally, Kaiko reported that BTC/USD spreads on major U.S. exchanges, including Coinbase, Kraken, and Bitstamp, have declined, suggesting improved liquidity conditions. The decrease in spreads may be due to structural factors, but overall, it indicates that trading costs in the United States have become more affordable. Spreads represent the difference between the buying and selling prices of an asset.
Earlier this month, there were concerns about a potential “sell-side liquidity crisis” for Bitcoin later in the year if institutional ETF inflows continued. However, daily inflows into ETFs have significantly slowed down in the past few days, dropping below $200 million from highs of over $500 million. The record daily inflow of $1 billion, which occurred last week when BTC hit an all-time high, seems to be an exception rather than the norm.
In conclusion, the recovery of market liquidity to pre-collapse levels and the decline in BTC/USD spreads indicate positive improvements in liquidity conditions. The surge in Bitcoin prices and the decrease in ETF inflows have contributed to this recovery.