Leading cryptocurrency exchange Coinbase took steps to allay worries about lack of Bitcoin trading liquidity after the SEC suit against Cumberland, a prominent market maker.
The exchange said its trading conditions have remained stable on Tuesday when it issued a statement. Specifically, Coinbase has put out its report stating a 2% drop in bitcoins order liquidity. This has been said to tally with the bitcoin price drop in October.
The statement goes directly against reports that have suggested a huge decline of liquidity on the platform, as well as an effort by the exchange to keep market confidence while under rule scrutiny.
Kaiko’s Conflicting Report on Liquidity
More than Kaiko, CEO Brian Armstrong tweeted Monday he believes the claims that Coinbase is short 0.26 percent of the Bitcoin supply, which the exchange has made in the face of market turmoil. Based on analysis carried out by Kaiko, the 2% bitcoin drop on Coinbase was experienced on October 10, starting at 18:00 UTC.
Liquidity dropped 46 percent to 267 BTC within a few hours, the report said. This substantial drop implies that an order 46% smaller than those before 18:00 UTC. The spot price could now move 2 percent in either direction.
Falling in line with Kaiko’s findings, Ethereum mogul Vitalik Buterin sees Coinbase’s statement as needing to be cycled through the media again in order to prove the opposite.
Analysis of Market Maker Behavior
Further insight into the behavior of market makers during this period of uncertainty are provided in Kaiko’s report. Indeed, the total liquidity fell but the analysis pointed out an interesting shift in the order book structure.
Sell orders experienced a sharp decline in the ask side depth. However, the bid depth for buy orders saw a spike to the upside. Kaiko interprets that as evidence that “market makers had adjusted their positions or were reckoning with a price fall.”
Taken together, these reallocations of orders suggest strategic response from market participants to a changing regulatory landscape and perhaps market volatility.
Broader Impact on U.S. Cryptocurrency Exchanges
The SEC’s lawsuit against Cumberland in the U.S. crypto exchange space beyond Coinbase has implications. According to the report by Kaiko, that wasn’t the only exchange to experience a lack of liquidity following the lawsuit.
More worrying is that we see that overall liquidity in U.S. exchanges has not returned to what it was before the lawsuit. The effects of regulatory actions on market dynamics were seen in this persistent liquidity reduction across multiple platforms.
This highlights critical questions about how much long term stability and health of cryptocurrency markets in the US will be affected by higher regulatory scrutiny.