Author: Blockchain Knight
Institutions have mastered ways to cope with Bitcoin price fluctuations, but the market volatility risk caused by insufficient liquidity during buying and selling remains a core obstacle to large-scale allocations.
Funds can hedge price fluctuations through options and futures, but they cannot avoid slippage costs arising from a thin order book, widening spreads, and rebalancing.
This highlights the importance of liquidity, which is not equivalent to trading volume but rather the market's ability to absorb trades at predictable costs. It needs to be measured from multiple dimensions, including the spot order book, derivatives, ETFs, and stablecoin cash channels.
On the spot level, the focus is on trade execution and liquidity replenishment capabilities. While the bid-ask spread is easy to reference, it may mask the issue of insufficient order volume. A 1% market depth (the volume of executable orders within 1% of the midpoint price) is more valuable for reference; its decline can lead to greater volatility and unpredictable execution costs for the same trade size.
Moreover, the speed of liquidity replenishment is key to distinguishing market resilience, and liquidity varies by time period. The depth and spread differences between active trading periods and conservative market-making periods are significant, and low depth near round numbers can exacerbate market sensitivity.
Derivatives and ETFs can transmit or alleviate pressure on the spot market. When spot trading volume shrinks, the concentrated leverage risk of perpetual contracts and futures becomes prominent. Soaring financing rates and widening basis indicate crowded positions, and subsequent market orders for forced liquidations during times of insufficient liquidity can exacerbate slippage and gaps.
ETFs provide dual liquidity markets—secondary (stock trading) and primary (subscription and redemption)—which can normally maintain consistency between ETF value and underlying asset value, helping investors indirectly adjust their exposure. However, when one-way capital flows are too large, they can still transmit pressure to the spot market.
The cash liquidity channels dominated by stablecoins are often overlooked but are a key prerequisite for institutional allocation. Institutions not only need Bitcoin liquidity but also reliable cash and collateral channels that can flow across platforms and integrate into margin systems, as spot and derivatives trading often relies on stablecoin trading pairs and collateral.
Due to regulatory systems and stablecoin-dominated liquidity, part of the liquidity in the crypto market is influenced by policies, which may lead to a situation where overall liquidity is abundant but accessible liquidity for institutions is insufficient, raising execution costs.
Measuring liquidity requires attention to four core indicators:
(1) 1% depth, best spread, and standardized slippage at major trading venues to assess liquidity expansion or contraction.
(2) Spot financing rates and futures basis to gauge position crowding.
(3) ETF secondary market spreads, trading volume, and subscription/redemption data to evaluate their liquidity buffering effect.
(4) Stablecoin liquidity and cross-platform concentration to ensure reliable execution during market volatility.
If the indicators improve collectively, large-scale trading by institutions will be easier to conduct; if they worsen, institutions will be more cautious, relying on packaged tools and hedging strategies to avoid trading during thin periods.
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