“ Based on trading volume and market depth, we found that most of the liquidity is concentrated in a few exchanges.”
Since the FTX debacle, we have paid special attention to the liquidity of the cryptocurrency markets and regularly produce reports such as:
Cryptocurrency Liquidity Ranking
Liquidity Status
Today we present a new liquidity report exploring the concentration of liquidity across exchanges, which we believe is an important topic as market makers retreat, regulators crack down on exchanges, and volume/volatility hit multi-year lows.
A highly concentrated cryptocurrency market is both a good thing and a bad thing.
There is no doubt that liquidity shortages, when liquidity is dispersed across many exchanges and trading pairs, can exacerbate volatility and disrupt the price discovery process. Natural market forces inevitably lead to increasing concentration of liquidity on a few platforms, which is beneficial to ordinary traders.
However, highly concentrated cryptocurrency markets can introduce points of failure to the industry (e.g., FTX debacle). Many centralized exchanges still lack basic protections for traders in the event of failures, hacks, or market manipulation.
By understanding where liquidity is concentrated around the world, we hope traders and market makers can make more informed decisions about where to deploy capital.
1. Data
With our new data product, Asset Liquidity Indicators, we are able to explore liquidity at the exchange level. This product greatly simplifies the process of aggregating trade and order book data from the 100+ exchanges covered by Kaiko.
For example, if I’m interested in BTC market depth and volume, I can quickly pull aggregate liquidity data — which includes BTC-USDT on Binance, BTC-TUSD on OKX, BTC-KRW on Upbit, and over 200 other instruments — all converted to USD and broken down by exchange since the token was first listed.
In this report, we collate the average 1% market depth and cumulative trading volume for BTC, ETH, and the top 30 crypto assets by market cap.
The vast majority of cryptocurrency trading activity is concentrated in these 30 assets, so we believe it provides a suitable metric for measuring exchange-level liquidity.
2. Results
1. Cryptocurrency Liquidity Concentration
Liquidity is concentrated, and becomes more concentrated over time.
In 2023, the top-ranked exchange Binance accounted for 30.7% of the global market depth and 64.3% of the global trading volume.
The top 8 platforms account for a whopping 91.7% of the depth and 89.5% of the trading volume.
Since 2021, Binance’s spot trading volume market share has risen from 38.3% to 64.3%.
Notably, a large portion of this growth is related to Binance’s zero-fee trading promotion.
2. Cryptocurrency spot trading volume concentration kaiko
Market depth concentration across top exchanges has actually decreased, from 42% to 30.7%, suggesting that Binance’s zero-fee trading initiative has had a different impact on trading volume than market depth.
However, just 8 exchanges still account for more than 90% of the global market depth.
3. The depth of concentration in the cryptocurrency market
Overall, both spot volume and market depth are concentrated on 8 platforms, which have remained fairly stable over the years.
3. Market Depth
Now let’s take a closer look at market depth. Kaiko’s order book data captures all bids and asks within 10% of the mid-price, which allows us to explore liquidity concentration at different percentage ranges.
We note that since the FTX crash, market depth at 0.1% (which includes bids and asks within a very narrow range) has recovered more than liquidity within a wider price range.
Cryptocurrency market depth changes 4.%
The depths of 1%, 2%, and 4% have remained largely unchanged since November. This suggests that market makers are increasingly supplying liquidity in a tight range.
4. “Altcoin Liquidity Concentration”
Now let’s take a closer look at altcoin liquidity, which has been hit particularly hard since the FTX debacle.
In August, it was reported that Binance had contacted token projects with low liquidity to request detailed information about market makers as part of a risk management plan. U.S. exchanges have also been affected by regulatory actions and the exit of several large market makers.
Therefore, altcoin liquidity is at a premium. When comparing altcoin market depth on US exchanges vs offshore exchanges, we can observe that concentration on offshore exchanges has increased from 65% to 71% since last year.
5. Altcoin Liquidity Market Share
Among existing exchanges in the United States, altcoin market depth is mainly concentrated in three platforms: Coinbase, Kraken, and Bitstamp.
6. Average altcoin market depth
Kraken’s altcoin liquidity performs particularly well, making it a strong competitor to Coinbase.
Kraken has not seen any decline in market depth for the top 30 altcoins since August 2022, while Coinbase has seen a liquidity loss of approximately $5 million.
7. Average altcoin market depth
Binance’s funding is down by over $10 million year-over-year, which could explain their promotion efforts for token projects.
When looking at the deep concentration of the top 10, 10-20, and 20-30 altcoins, it is clear that the majority of liquidity is supplied to the top 10 altcoins, especially Kraken.
Conclusion
Liquidity, measured by trading volume and market depth, is concentrated on a handful of platforms. There are hundreds of cryptocurrency exchanges worldwide, but many cater to only a small fraction of market activity.
While concentrating liquidity on a small number of exchanges may be optimal from a market perspective, the cryptocurrency industry generally places a high value on decentralization. CEX liquidity is hardly decentralized.
✏️Disclaimer: This article is for reference only, DYOR
📄Source: Alpha Research, Dessislava Aubert and Clara Medalie
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