Author: Arthur Azizov, Founder and Investor at B2 Ventures
Despite the decentralized nature of cryptocurrencies and the promises they hold, they remain a form of currency. Like all currencies, they cannot escape the realities of today's market dynamics.
As the cryptocurrency market evolves, it begins to reflect the lifecycle of traditional financial instruments. The illusion of liquidity is one of the most pressing and surprisingly under-discussed issues arising from market evolution.
The global cryptocurrency market is valued at $2.49 trillion in 2024 and is expected to more than double to $5.73 trillion by 2033, with a compound annual growth rate of 9.7% over the next decade.
However, beneath this growth lies vulnerability. Like the forex and bond markets, cryptocurrencies are now challenging false liquidity: order books that appear strong during calm periods quickly thin out during storms.
The forex market has a daily trading volume exceeding $7.5 trillion and has historically been considered the most liquid market. However, even this market is now showing signs of fragility.
Some financial institutions and traders are concerned about the illusion of market depth, as even the most liquid forex pairs (like EUR/USD) are experiencing more pronounced slippage. During sell-offs, no bank or market maker is prepared to face the risk of holding volatile assets—what is referred to as storage risk post-2008.
In 2018, Morgan Stanley pointed out a profound shift in where liquidity risk resides. Post-financial crisis capital requirements pushed banks out of the liquidity provision space. The risk did not disappear; it merely shifted to asset management firms, ETFs, and algorithmic systems. At that time, passive funds and exchange-traded instruments saw a boom.
In 2007, index funds held only 4% of the free-floating shares of the MSCI World Index. By 2018, that number had doubled to 12%, with concentration in specific stocks reaching as high as 25%. This situation illustrates a structural mismatch—liquidity packaging includes illiquid assets.
ETFs and passive funds promise easy entry and exit, but the assets they hold, particularly corporate bonds, do not always meet expectations when the market becomes volatile. During periods of sharp price fluctuations, ETF sell-offs often exceed those of the underlying assets. Market makers demand wider spreads or refuse to enter, unwilling to hold assets during turmoil.
This phenomenon was first observed in traditional finance and is now playing out in cryptocurrencies in a familiar manner. Liquidity may only appear strong on paper. On-chain activity, token trading volume, and centralized exchange order books all suggest market health. But when sentiment deteriorates, depth disappears.
The illusion of liquidity in cryptocurrencies is not a new phenomenon. During the cryptocurrency slump in 2022, major tokens experienced significant slippage and widening spreads even on top exchanges.
The recent collapse of Mantra's OM token serves as another reminder—when sentiment shifts, buying interest evaporates, and price support disappears. What initially appears to be a deep market under calm conditions can collapse in an instant under pressure.
This is primarily because the infrastructure of cryptocurrencies remains highly fragmented. Unlike stock or forex markets, cryptocurrency liquidity is dispersed across many exchanges, each with its own order book and market makers.
Recently: Asia holds cryptocurrency liquidity, but U.S. Treasuries will release institutional funds
This fragmentation is even more pronounced for second-tier tokens—those outside the top 20 by market capitalization. These assets are listed on various exchanges without unified pricing or liquidity support, relying on market makers with different authorizations. Thus, liquidity exists but lacks meaningful depth or cohesion.
Opportunistic participants, market makers, and token projects exacerbate the problem by creating an illusion of activity without contributing real liquidity. Deception, wash trading, and inflated trading volumes are common, especially on smaller exchanges.
Some projects even stimulate artificial market depth to attract listings or appear more legitimate. However, when volatility strikes, these participants retreat immediately, leaving retail traders to face price collapses. Liquidity is not only fragile but entirely illusory.
Integration at the foundational protocol level is needed to address the issue of liquidity fragmentation in cryptocurrencies. This means embedding cross-chain bridging and routing capabilities directly into the core infrastructure of blockchains.
This approach is now being actively adopted by selected first-layer protocols, viewing asset movement as a foundational design principle rather than an afterthought. This mechanism helps unify liquidity pools, reduce market fragmentation, and ensure capital flows smoothly within the market.
Moreover, the underlying infrastructure has made significant progress. Execution speeds that once required 200 milliseconds have now dropped to 10 or 20 milliseconds. The cloud ecosystems of Amazon and Google, with P2P messaging between clusters, enable transactions to be processed entirely within the network.
This performance layer is no longer a bottleneck—it is a launchpad. It allows market makers and trading bots to operate seamlessly, especially since 70% to 90% of stablecoin trading volume (a major part of the cryptocurrency market) now comes from automated trading.
However, merely having better pipelines is not enough. These outcomes should be combined with smart interoperability and unified liquidity routing at the protocol level. Otherwise, we will continue to build high-speed systems on a fragmented basis. Nevertheless, the foundation is in place and is finally strong enough to support something larger.
Author: Arthur Azizov, Founder and Investor at B2 Ventures.
This article is for general informational purposes only and is not intended to be, nor should it be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Original article: “The Deep Liquidity Problem in Traditional Finance is a Hidden Structural Risk in Cryptocurrency”
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
