As the crypto world grapples with the aftermath of the FTX collapse, Kaiko’s recent report sheds light on a pivotal question: Can the impending ETF approval breathe new life into Bitcoin’s liquidity? Delving into the impacts of an ETF, the report dissects market depth, trade volume, and the role of market makers.

So, let’s unravel the intricacies of Bitcoin’s liquidity landscape and explore the potential ramifications of ETFs.

How ETFs Can Impact Bitcoin Liquidity?

Since the FTX collapse, the crypto sphere has weathered a storm of diminishing liquidity, impacting volumes and order book depth universally. Meanwhile, the recent report of Kaiko underscores the harsh reality that the latest market rally has not resurrected pre-FTX levels. Notably, the looming prospect of an ETF approval in January introduces a ray of hope, albeit with caution.

Meanwhile, Kaiko suggested two ways an ETF could trigger in liquidity surge of Bitcoin: liquidity transferred via trading and liquidity transferred via market makers (MMs). The report contends that an ETF could exponentially broaden the crypto trader base, fostering larger volumes and more efficient markets. In addition, market makers, too, stand to gain as ETFs provide a hedge, potentially expanding their operations.

However, Kaiko also highlights concerns that significant ETF outflows might exert selling pressure on underlying markets. Additionally, market makers could respond by imposing higher spreads due to an influx of informed traders. This dichotomy sets the stage for a critical examination of Bitcoin’s current liquidity status.

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Navigating Challenges and Opportunities

Following the FTX collapse, Bitcoin’s market depth witnessed a substantial decline. In addition, the recent market rally, though marginally impacting liquidity, has largely been attributed to price effects.

Meanwhile, as Bitcoin Spot ETF approval looms, the importance of market depth surfaces. Notably, the ETF issuers engaging in buying and selling the underlying asset might spur increased flows on centralized spot exchanges. Liquidity, crucial for arbitrageurs in maintaining market efficiency, becomes a linchpin in the ETF narrative.

In addition, FTX’s impact on trade volume, though less significant than market depth, echoes the volatility seen since November 2022. Despite a modest recovery after the March banking crisis, overall volumes still lag behind pre-FTX levels. An ETF approval, the report suggests, could reshape trading costs as more informed investors enter the Bitcoin market.

However, the report suggests that despite the ongoing market turmoil, Bitcoin stands resilient as the most liquid crypto asset. Comparing trade volume distribution over the past year, BTC consistently outperforms ETH and top altcoins.

Considering all these aspects, Kaiko suggested that an ETF approval could further solidify Bitcoin’s dominance, potentially influencing the broader market dynamics.

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Rupam, a seasoned professional with 3 years in the financial market, has honed his skills as a meticulous research analyst and insightful journalist. He finds joy in exploring the dynamic nuances of the financial landscape. Currently working as a sub-editor and crypto journalist at Coingape, Rupam’s expertise goes beyond conventional boundaries. His contributions encompass breaking stories, delving into AI-related developments, providing real-time crypto market updates, and presenting insightful economic news. Rupam’s journey is marked by a passion for unraveling the intricacies of finance and delivering impactful stories that resonate with a diverse audience.

The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.