By
Chimamanda U. Martha
April 24th, 2024
As the growing liquidity strain in the price of Bitcoin is a major concern, American banks are likely to start exploring new avenues to rebuild that part of the industry.
The recent bank runs of American banks as recorded in March have fueled a massive pulldown on the liquidity base of Bitcoin (BTC), the world’s largest digital currency by market capitalization. As reported by CoinTelegraph citing data from crypto analytics provider, Kaiko, the drained liquidity in the market has hit a 10-month low despite the bullish price outlook of Bitcoin since the start of the year.
In the heart of the banking crisis, three of the major financial institutions that serve the crypto ecosystem including Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank all met their waterloo. While Silvergate initially closed its operations due to a fallout in its accounting process last month, Signature was closed by regulators to prevent a harsher bank run.
The aftermath of the collapse of these banks was very significant for the crypto industry as the avenues to channel on-and-off-ramp features were remarkably crushed. As investors sought avenues to stay safe, the regulatory actions of US regulators including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have left investors more worried than normal.
According to insights from Conor Ryder, a research analyst at Kaiko, exchanges based in the United States like Coinbase Global Inc (NASDAQ: COIN) and Kraken have been the hardest hit by the closure of the industry’s dominant payment rails.
“US exchanges have been hardest hit due to the closure of USD payment rails and crypto banks…Market makers in the region facing unprecedented challenges to their operations,” he said, adding that “Spreads for USD pairs have displayed a similar trend, suffering more volatility as a result of the uncertainty in the US.”
According to the liquidity strain, the analyst points out that the slippage for trading pairs on Coinbase now exceeds that of non-US-based exchanges like Binance.
American Banks to Rebuild the Industry
As the growing liquidity strain in the price of Bitcoin is a major concern, American banks are likely to start exploring new avenues to rebuild that part of the industry. While there is difficulty in operating their businesses without a viable payment rail, the options left are limited and may include scampering off to the mainstream financial institutions.
Based on the regulatory uncertainty surrounding the activities of exchanges, finding the right banking partner for some of the most detailed and complicated activities may prove to be somewhat difficult.
As a major precaution in the short term, traders in the US are embracing USDT liquidity pairs in place of the USD, a move that has generally helped cushion the impact of the banking crisis thus far. Ryder noted that despite the temporary relief it grants investors brings more pains in the long term than the benefits it tends to offer in the short term.
With this temporary cushion, USDC and USDT appear to be on the positive receiving ends.