Liquidity in the crypto markets continues to face challenges when compared to traditional financial markets. A recent report from S&P Global highlighted the various factors contributing to this disparity, including fragmentation, technical differences, and susceptibility to external shocks.
The study conducted by S&P Global delved into key liquidity metrics such as volume, bid-ask spreads, market depth, and slippage across both centralized and decentralized trading platforms for popular cryptocurrencies like Bitcoin, Ethereum, and stablecoins.
One of the key findings of the report was the fragmented nature of crypto trading platforms, with liquidity profiles varying significantly across different exchanges, asset pairs, and trade sizes. While efficiency in these platforms has improved over time, they still fall short in comparison to traditional markets like the NYSE in terms of spot trading volumes.
Centralized exchanges (CEXs) function similarly to traditional stock markets with order books and custodial accounts, offering high speed and low spreads on stablecoin pairs and large-cap coins like Bitcoin. On the other hand, decentralized exchanges (DEXs) provide users with custody through automated market makers (AMMs) but are susceptible to price slippage and impermanent loss, especially during volatile periods.
Despite the challenges faced by DEXs, certain digital assets like BTC, ETH, and USDT exhibit bid-ask spreads comparable to or even narrower than mid-cap equities like Broadcom. CEXs continue to dominate market volume and provide higher liquidity compared to DEXs, although decentralized platforms offer deeper access.
The launch of Bitcoin and Ether ETFs in the US has contributed to increased trading activity and liquidity on crypto exchanges, although ETF trading volumes are still smaller than the underlying assets. Political instability and exchange hacks can significantly impact localized liquidity, as seen in cases like the political crisis in South Korea and the breach at Bybit.
Stablecoin liquidity remains higher in crypto-to-crypto trades compared to fiat pairs due to banking hurdles and compliance issues. The growth of stablecoins combined with easing regulations could further solidify their role in the financial sector. Slippage analysis on platforms like Uniswap shows that low-volatility stablecoin pairs maintain minimal slippage, while ETH pairs can experience significant variation during price movements.
Overall, while the crypto market is maturing with the involvement of institutional investors and regulated products, challenges such as fragmentation, design limitations, and inconsistent depth continue to hinder its full-scale efficiency. As the industry evolves, addressing these issues will be crucial for improving liquidity and market stability.