The era of US spot Bitcoin exchange-traded funds is a chance to repair the decay in crypto markets caused by the collapse of the FTX exchange and its sister hedge fund Alameda Research, according to market makers.
The implosion of the two former linchpins of digital assets in late 2022, after a rout in token prices and a huge fraud, left an “Alameda gap” in crypto trading of stunted volumes alongside a reduced capacity to absorb orders smoothly.
Leading market makers Auros, Wintermute Trading Ltd. and GSR Markets Ltd. expect the gap to start closing but say the process will take time. They argue the funds from the likes of BlackRock Inc. and Fidelity Investments that went live on Jan. 11 — the first US ETFs to directly hold Bitcoin — will bring more investor attention and flows to virtual coins.
“We expect to see a general uplift in liquidity across the board,” said Le Shi, head of trading at Auros, adding the process could take “weeks or months” and be temporarily disturbed by short-term shifts in sentiment.
Market makers deploy their own capital and borrowed funds to create markets for tokens, seeking to profit from differences in buying and selling prices.
Net Flows
The 10 US spot Bitcoin ETFs have attracted overall net inflows of about $1.6 billion so far, data compiled by Bloomberg show. Trading volume in the ETFs fell to $1.2 billion on Jan. 31 from $4.7 billion on the first day, in part as hype about them cooled, Bloomberg Intelligence said.
The products have already impacted crypto markets. Anticipation of the ETFs, plus bets on looser monetary policy, lifted Bitcoin 88% in the past 12 months to about $43,000. The largest digital asset scaled $49,000 intraday when the ETFs began trading, about $20,000 below its 2021 record, but didn’t hold the spike.
Spot digital-asset trading volumes hit a 19-month high of almost $1.4 trillion in January, according to CCData, though that’s still lower than the monthly average level during the pandemic-era crypto bull run of 2021.
“I expect us to get to 2021 levels of volumes by the end of the year, for Bitcoin especially,” Wintermute’s co-founder Evgeny Gaevoy said. “If we get to the level of 2021 in terms of how crazy everything is, we would need to raise hundreds of millions in trading capital.”
Market Depth
Market depth — the crypto market’s ability to shoulder relatively large orders without unduly impacting prices — has improved while remaining lower than before the bankruptcies of FTX and Alameda Research.
The daily average quantity of bids and asks within 2% of Bitcoin’s price saw a “slight uptick” over January while falling short of pre-FTX levels, “suggesting that market makers have not returned in full force,” researchers Kaiko wrote in a post on X. A higher quantity of bids and asks within 2% equates to better liquidity, and vice versa.
👀#BTC's 2% market depth has seen a slight uptick since the end of December.
📏However, it still falls short of its pre-FTX levels, suggesting that market makers have not returned in full force. pic.twitter.com/YGBEHs5uej
— Kaiko (@KaikoData) January 30, 2024
Kaiko coined “Alameda gap” in 2022, a catchall term acknowledging the role the hedge fund played in providing crypto liquidity as well as the chilling effect of its wipeout and a subsequent regulatory clampdown.
The outlook now has improved as long-term flows into the ETFs are set to exceed expectations, argued Chuan Jin Fong, head of sales for Asia, Europe and the Middle East and Africa at GSR Markets.
“There will be a natural tightening of bid-ask spreads with overall liquidity growing, order sizes rising and market depth improving,” Fong said.
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