Since the FTX collapse, we have been closely monitoring cryptocurrency market liquidity and producing regular reports to help everyone understand it better. Today, we have a new report focusing on the concentration of liquidity across different cryptocurrency exchanges. This is important because as market participants dwindle, regulatory measures tighten on exchanges, and trading volatility decreases, understanding where liquidity is concentrated becomes crucial.
Highly concentrated cryptocurrency markets can be both advantageous and disadvantageous. On one hand, having substantial liquidity concentrated on a few platforms can benefit average traders. On the other hand, it can also create issues, as we witnessed with the FTX collapse. Many centralized exchanges lack adequate safeguards for traders in the event of problems such as exchange failures, hacks, or market manipulation.
By examining the concentration of liquidity on a global scale, we hope that traders and market participants can make more informed decisions about where they want to invest their money.
We are able to assess liquidity at the exchange level thanks to our new data product called Asset Liquidity Metrics. This product streamlines the process of aggregating trade and order book data from over 100 exchanges covered by Kaiko. For example, if I want to inquire about Bitcoin’s trading depth and volume, I can rapidly access data from various exchanges where Bitcoin is traded, such as Binance, OKX, and Upbit, and observe how it has changed over time.
For this report, we have compiled data on the average 1% market depth and cumulative trade volume for Bitcoin (BTC), Ethereum (ETH), and the top 30 cryptocurrencies by market capitalization. The majority of trading activity in the crypto market occurs with these top 30 assets, making them a suitable metric for measuring exchange-level liquidity.
Liquidity is highly concentrated and has become even more so over time. In 2023, Binance is the top exchange, accounting for 30.7% of the global market depth and 64.3% of the global trade volume. The top 8 largest platforms collectively constitute a significant 91.7% of market depth and 89.5% of trade volume.
Since 2021, Binance’s market share of spot volume has surged from 38.3% to 64.3%, with a substantial portion of this increase attributed to Binance’s zero-fee trading promotion.
Interestingly, the concentration of market depth has actually decreased for the top exchange, falling from 42% to 30.7%. This suggests that Binance’s zero-fee trading program had a greater impact on trade volume compared to market depth. However, just 8 exchanges still account for more than 90% of global market depth.
Overall, both spot volumes and market depth are heavily concentrated on just 8 platforms, and this trend has remained consistent over the years.
Let’s now delve deeper into market depth. We use order book data to measure liquidity within different price ranges. We have noticed that since the FTX collapse, liquidity in the very tight 0.1% market depth range has recovered more than liquidity in wider price ranges.
Altcoin Liquidity Concentration:
Now, let’s shift our focus to altcoin liquidity, which has been significantly impacted since the FTX collapse. Binance and U.S. exchanges like Coinbase have faced regulatory challenges, affecting liquidity. Altcoin market depth on offshore exchanges has increased from 65% to 71% since last year.
Among U.S. exchanges, Coinbase, Kraken, and Bitstamp dominate altcoin market depth. Kraken’s altcoin liquidity has performed well, even outperforming Coinbase since August 2022. Binance has experienced a significant drop in liquidity, prompting outreach efforts to token projects. The majority of liquidity is concentrated in the top 10 altcoins, especially on Kraken.
Liquidity, as measured by trade volume and market depth, is heavily concentrated on just a handful of platforms. While this may be efficient from a market perspective, it does not align with the crypto industry’s emphasis on decentralization. Centralized exchange (CEX) liquidity remains highly centralized, despite the industry’s broader goals of decentralization.