Bitcoin (BTC) Up 70% YoY After FTX Crash, But ‘Alameda Gap’ in Liquidity Remains
Notably, the value of Bitcoin (BTC) has risen by a staggering 70% since the collapse of FTX, one of the largest cryptocurrency exchanges, a year ago. However, despite this impressive growth, a long-standing problem remains – the Alameda liquidity gap. The term refers to the decline in order book liquidity following the collapse of FTX and its subsidiary Alameda Research. As a result, the cryptocurrency market continues to be dominated by weak liquidity and market depth, limiting the market’s ability to accept large orders at stable prices. This article examines the impact of the Alameda Gap on the liquidity and market depth of Bitcoin and other cryptocurrencies, highlighting the challenges traders face and the potential for increased price volatility.
Bitcoin Is Up 70% a Year After FTX Collapse
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The Collapse of FTX and Alameda Research
The November 2022 CoinDesk publication triggered the collapse of FTX and Alameda Research. Sam Bankman Freed, the founder of FTX, was later found guilty of fraud. FTX, once the third largest cryptocurrency exchange in the world, has played a significant role in the cryptocurrency market. Along with FTX, its subsidiary Alameda Research also collapsed. Alameda Research has been one of the leading market makers in the industry, providing significant liquidity in Bitcoin, Ether and other alternative cryptocurrencies.
Bitcoin’s Rally and Scars of the Collapse
Despite the collapse of FTX and Alameda Research, Bitcoin managed to bottom in November 2022 and then posted an impressive 70% rise to reach a price of $34,300. However, the crash left lasting scars of poor liquidity and market depth. Liquidity is the market’s ability to absorb large orders without significantly affecting prices. On the other hand, market depth measures the liquidity available at different price levels. Liquidity and market depth suffered as a result of the crash.
The Alameda Gap in Liquidity
The term “Alameda Gap” refers to the deterioration in order book liquidity following the collapse of FTX and Alameda Research. The deterioration in liquidity has affected not only Bitcoin, but also Ethereum and other alternative cryptocurrencies. According to Desislava Obert, research analyst at Kaiko, the shared market depth for these cryptocurrencies has decreased by 55% over the past year. This means that smaller order sizes are needed to influence prices compared to the previous year, highlighting weak liquidity in the market.
Impact on Slippage Costs and Price Volatility
The weak liquidity caused by the Alameda Gap had a direct impact on slippage costs and price volatility. Slippage costs are the difference between the expected cost of making a trade and the actual cost. As liquidity decreases, large orders become more difficult to fill, resulting in higher slippage costs. In addition, the impact of large orders on prices becomes more pronounced, leading to increased price volatility. This volatility can create problems for traders and investors as it introduces uncertainty and risk into the market.
Alameda’s Role as a Market Maker
Before the collapse, Alameda Research played a critical role as one of the leading market makers in the cryptocurrency industry. Market makers provide liquidity to the market by buying and selling assets, acting as both buyers and sellers. Alameda Research provided liquidity in Bitcoin, Ether and alternative cryptocurrencies, contributing to the overall stability and functioning of the market.
Current State of Market Depth
The collapse of FTX and Alameda Research had a huge impact on market depth. Market depth measures the liquidity available at different price levels, which indicates the market’s ability to absorb large orders without significantly affecting prices. A comparison of market depth before and after the crash shows a sharp decline. Currently, the combined market depth of Bitcoin, Ethereum and altcoins is 2% of the total market capitalization, which is 55% less than last year. This indicates the difficulties the market faced in recovering from the crash.
Improvement in Bitcoin’s Liquidity
While the collapse of FTX and Alameda Research had a detrimental impact on liquidity and market depth, there have been some signs of improvement, especially in the case of Bitcoin. Bitcoin market depth rose to $350 million in October 2023 from $250 million in the previous quarter. This improvement coincided with a rise in the price of Bitcoin, which rose 28% in October, the largest percentage increase in a single month since January. These positive developments indicate a possible recovery in Bitcoin liquidity.
Lack of Improvement for Ether and Alternative Cryptocurrencies
While Bitcoin has shown signs of improving liquidity, the same cannot be said for Ethereum and alternative cryptocurrencies. The collapse of FTX and Alameda Research had a lasting impact on the liquidity and market depth of these cryptocurrencies, and they struggled to recover. The lack of improvement creates problems for traders and investors who rely on liquidity and market depth to execute their trades efficiently and accurately.
The collapse of FTX and Alameda Research following the CoinDesk publication in November 2022 significantly affected the liquidity and depth of the cryptocurrency market. Despite Bitcoin’s astonishing 70% rise in the past year, poor liquidity and market depth still mark the scars of the crash. The liquidity gap in Alameda increased slippage costs and increased price volatility. Alameda Research’s role as a leading market maker is under threat, and the market depth in Bitcoin, Ethereum and alternative cryptocurrencies is struggling to recover. Despite some improvements in Bitcoin liquidity, Ethereum and alternative cryptocurrencies still face challenges in this regard. Overall, the collapse of FTX and Alameda Research had a lasting impact on the cryptocurrency market, highlighting the importance of liquidity and market depth in maintaining a stable and efficient market environment.