Crypto market liquidity highly concentrated among top exchanges

According to a recent report by crypto research firm Kaiko, liquidity in the world of cryptocurrency trading is highly concentrated among a few exchanges, with eight major exchanges accounting for nearly 90% of the total trading volume. According to the Kaiko report, these influential exchanges include Binance, Coinbase, OKX, and Huobi.

Among this dominant group, Binance has consistently held the crown as the world’s leading crypto exchange in terms of trading volume for several years. Remarkably, Binance alone is responsible for over 30% of the global market depth and commands more than 60% of the worldwide trade volumes this year.

According to Kaiko’s analysis, such a concentrated liquidity landscape has both positive and negative implications for the cryptocurrency market. It can result in enhanced liquidity, which can ultimately improve the overall trading experience for market participants. However, it also raises concerns about the vulnerability of the market, as a disruption or failure on any of these major exchanges could have widespread repercussions. This vulnerability was recently highlighted by the collapse of FTX, serving as a stark reminder of the potential risks associated with highly concentrated liquidity.

The crypto community has been closely monitoring this concentration of liquidity, as it can lead to thinner trading volumes and, subsequently, more pronounced price fluctuations. In August, crypto trading volumes reached their lowest point of the year, registering an 11.5% decline to $2.09 trillion for both spot and derivatives trading combined. This decrease in volume occurred despite positive developments in the crypto space, such as the anticipation surrounding the potential approval of a Bitcoin ETF.

Bloomberg’s analysis of Kaiko’s research findings quoted K33 analysts Anders Helseth and Vetle Lunde, who noted that despite a relatively slow summer, there are indications that volatility is returning to the crypto market. They pointed out, “The jumpy market over the last few weeks signals a changing volatility environment in BTC. This summer saw unusually low volatility, and while prices have yet to see any meaningful breakouts following the Aug. 17 push lower, climbing daily volatility reincentivizes participation from vol-thirsty day traders.”

The concentration of liquidity in crypto markets among a handful of major exchanges is a double-edged sword, offering improved liquidity while also introducing heightened systemic risks. The recent decline in trading volumes, despite positive industry developments, highlights the challenges posed by this concentration. As the crypto market continues to evolve, striking a balance between liquidity and risk mitigation remains a paramount concern for traders and analysts alike.