The Buck Stops Here: Improving Market Liquidity & Infrastructure for the Next Trillion Market Cap

- Crypto liquidity is healthy but it’s off the highs of 2021

- The presence of HFTs and market makers is balancing out retail and billion dollar liquidations are absorbed regularly

- Fragmentation and lack of efficiency in capital and credit allocation due to pre-funding remain hurdles to growth

With $36 billion flowing into Bitcoin ETFs in the past year and new participants entering the space, liquidity gaps and frequent flash crashes are things of the past, panelists said.

The changes are down to the different mix of participants in what used to be a predominantly retail-driven market. As market makers from both crypto and traditional markets increased their presence due to the arrival of ETFs the change in composition has resulted in more stability.

“ETFs have changed the market structure,” said Leon Marshall, CEO of Galaxy Europe and Global Head of Sales at Galaxy Digital.

Thomas Restout, Group CEO of B2C2, noted that liquidity conditions remain below the highs seen in 2021, while Tim Ogilvie, Global Head of Kraken Institutional, added that participation from retail has yet to hit previous peaks.

Ogilvie also highlighted a “tale of two markets,” noting that outside the most traded pairs and beyond the cash market conditions are less favourable.

“The Bitcoin market is very deep, very liquid, and has a lot of activity. But further out the risk curve is where more stressed liquidity starts to happen. There isn’t the depth of institutional activity in terms of markets on CME, or just overall activity to absorb what will be a lot of energy going into this space,” he said.

The hurdles to improving these conditions are due to regulations that make it prohibitively expensive for banks to enter the space, although some think that there will be pushback from the industry as many financial institutions are keen to participate.

“The Bank for International Settlements approach, which is being implemented at the national level, will make it very difficult to scale these businesses,” said Mathias Imbach, Co-founder and Group CEO of Sygnum, who noted that this is especially true for derivatives and longer-dated products.

“Hopefully, with positive lobbying, we can end up in a place where it can scale sustainably. Otherwise, it will always be – even for big players – a reason to not get into the crypto space,” Imbach added.

Restout also pointed to the high level of fragmentation in terms of liquidity pools and the lack of capital efficiency due to having to pre-fund trades on individual exchanges. “As more traditional players come into the space, they can’t make sense of the systems and how to trade,” he said. “All the major exchanges are pre-funded, which the traditional market isn’t used to. So, having a prime broker in the middle is important to help bridge the gap between the world that people are used to and the world that settles on blockchain,” he said.

Panelists were also positive on the prospects of DeFi, noting that banks will go wherever their clients go.