Opinion of: Arthur Azizov, founder and investor at B2 Ventures
Despite its decentralized nature and its great promise, cryptocurrency continues to be a currency. As with all currencies, it cannot escape the realities of today's market dynamics.
While the cryptom market develops, it reflects the life cycle of traditional financial instruments. The illusion of liquidity is one of the vital urgent and surprising, less addressed problems that arise from the event of the market.
The global marketplace for cryptocurrencies was valued in 2024 value 2.49 trillion dollars and is anticipated to be greater than double by 2033 and grow as much as $ 5.73 trillion USDs by 2033, which is growing in the following decade with a composed annual growth rate of 9.7%.
However, there’s a fragility under this growth. Like the FX and bond markets, Crypto now calls for the Phantom liquidity: Order books that quickly look thin in the course of the storms in the course of the quiet times.
The illusion of liquidity
With a day by day trading volume of over 7.5 trillion US dollars, the foreign exchange market was historically perceived as probably the most liquid. But even this market now shows signs of fragility.
Some financial institutions and dealers fear the depth of the market, and regular slips even with probably the most fluid FX pairs, resembling EUR/USD, have gotten increasingly tangible. No single bank or a single market manufacturer is able to take the danger of keeping volatile assets during a sale of the so-called warehouse risk after 2008.
In 2018, Morgan Stanley found a profound shift within the position where there are liquidity risks. After the financial crisis, the investment requirements pushed the investment from the liquidity provision. Risks didn’t disappear. They just went to asset managers, ETFs and algorithmic systems. At that point there was a boom of passive means and hand -handed vehicles.
In 2007, only 4% of the MSCI World Free Float held 4% of the MSCI World Free Float. By 2018, this number had tripled to 12%, with concentrations as much as 25% in certain names. This situation shows a structural non -agreement – liquid packaging that comprises illiquid assets.
ETFs and passive funds promised a simple entry and end result, however the assets, especially the company bonds, couldn’t at all times meet expectations when the markets became volatile. In the case of drastic price fluctuations, ETFs are sometimes sold more intensively than underlying assets. The market makers demanded larger spreads or refused to enter, which was not willing to maintain assets through turbulence.
This phenomenon, which was first observed in traditional funds, is now fiddling with familiarity in crypto. Liquidity may only appear robust on paper. Onchain activity, token volumes and order books for the central stock exchanges indicate a healthy market. But when the sensation acidifies, the depth disappears.
Cryptos Liquiditätislusion finally involves light
The illusion of liquidity in crypto will not be a brand new phenomenon. During the crypto desolation in 2022, large tokens also recorded a big spread and spread of the upper exchange.
The most up-to-date crash of Mantras OM -Token is one other memory – if the mood changes, bids disappear and costs evaporate. What initially looks like a deep market under calm conditions can collapse immediately under pressure.
This mainly happens since the crypto infrastructure stays very broken. In contrast to stocks or FX markets, the crypto liquidity is distributed via many stock exchanges, each with their very own order book and market manufacturers.
Youngest: Asia holds crypto liquidity, but US finance will unlock institutional means
This fragmentation is much more tangible for Tier -2 -token -those outside the highest 20 of market capitalization. These assets are listed across stock exchanges without uniform pricing or liquidity support, whereby market makers are leaving with different mandates. However, liquidity exists without meaningful depth or cohesion.
The problem deteriorates with opportunistic actors, market manufacturers and tokens projects that create an illusion of activities without contributing to real liquidity. Spoofing, washing trade and inflated volumes are sometimes common on small stock exchanges.
Some projects even stimulate a man-made market depth to draw listings or appear more legitimate. However, if the volatility hits, these players withdraw immediately and leave retail dealers from Toe-to-toe with a price fall. Liquidity will not be only fragile, but simply fallacious.
The solution to the liquidity problem
The integration at the extent of the bottom protocol is required to cope with liquidity fragmentation in crypto. This implies that Crisschain bridging and routing functions embed the core infrastructure of the blockchain directly.
This approach, which is now actively accepted by chosen protocols for the Layer 1 protocols, doesn’t treat the asset movement as a subsequent but as a basic design principle. This mechanism helps to mix liquidity pools, to scale back market fragmentation and to make sure easily capital flow over the market.
In addition, the underlying infrastructure has already covered a great distance. Execution speeds that after lasted 200 milliseconds have now dropped to 10 or 20. Amazon and Google's Cloud ecosystems which have P2P messages between clusters enable trades to be processed completely on the network.
This performance layer is not any longer a bottleneck – it’s a launch pad. It enables market manufacturers and trade in bots to work seamlessly, especially 70% to 90% of StableCoin transaction volumes, a very important segment of the crypto market, now comes from automatic trading.
However, higher plumber alone will not be enough. These results ought to be paired with intelligent interoperability on the protocol level and uniform liquidity routing. Otherwise we’ll proceed to construct high -speed systems on the fragmented soil. Nevertheless, the inspiration is already there and eventually strong enough to support something greater.
Opinion of: Arthur Azizov, founder and investor at B2 Ventures.
This article serves general information purposes and mustn’t be thought to be legal or investment advice. The views, thoughts and opinions which are expressed listed here are solely that of the creator and don’t necessarily reflect the views and opinions of cointelegraph or don’t necessarily represent them.
