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The liquidity issues that surfaced in the crypto world following the FTX crash are being brought to the fore together with Kaiko’s latest report on potential impacts of Bitcoin ETFs. Whether the upcoming ETF approval could rejuvenate Bitcoin’s liquidity or possibly lead to liquidity problems stands as an important question mark.
According to the report, the potential of an ETF to increase Bitcoin’s liquidity relies on two main pathways: liquidity transmitted through trading and liquidity transmitted through market makers (MMs). The ETF approval is said to be capable of expanding the crypto trader base and leading to more effective markets. However, the report carries a concern that significant ETF releases could create selling pressure in primary markets and knowledgeable traders’ influx could cause market makers to apply higher spreads.
After the FTX crash, while Bitcoin’s market depth has significantly decreased, the significance of market depth is increasing with the approaching ETF approval. It is thought that ETF publishers could potentially lead to increased flows at centralized spot exchanges while buying and selling the underlying assets. This situation could play a critical role for arbitrators in terms of maintaining market efficiency.
The report suggests that the impact on FTX’s trading volume could potentially shape trading costs along with the volatility seen since November 2022. However, it suggests that Bitcoin has left other crypto assets behind with its trading volume distribution which did not exceed last year’s levels. Taking into account all these factors, Kaiko suggests that an ETF approval could reinforce Bitcoin’s superiority and potentially affect overall market dynamics.
In summary, Bitcoin ETFs could revitalise the market, but at the same time could cause liquidity problems. Investors should follow the ETF approval process carefully and develop strategies suitable for market dynamics.
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