Will ETFs Revitalize the Market or Create Liquidity Issues for Bitcoin?

• Since the FTX collapse, the crypto space has universally weathered a liquidity storm affecting volumes and order book depth.
• Kaiko suggests two ways in which an ETF could trigger Bitcoin’s liquidity: liquidity transmitted through trading and liquidity transmitted through market makers (MMs).
• Kaiko emphasizes concerns about significant ETF outflows creating selling pressure on underlying markets.

Spot Bitcoin ETFs, how can they impact the Bitcoin market? Exploring potential scenarios and predictions from the research firm!

Effects of Spot Bitcoin ETFs

While navigating the crypto world after the FTX collapse, Kaiko’s recent report sheds light on a crucial question: Can the upcoming ETF approval bring new vitality to Bitcoin’s liquidity? The report delves into the effects of the ETF on market depth, trading volume, and the role of market makers. So, let’s unravel the intricacies of the liquidity landscape for Bitcoin and explore the potential impacts of ETFs…

Since the FTX collapse, the crypto space has universally weathered a liquidity storm affecting volumes and order book depth. Meanwhile, Kaiko’s recent report highlights the bitter reality that the recent market rally did not revive the previous FTX levels. Notably, it mentions the hopeful anticipation of an upcoming ETF approval in January but urges caution.

In the meantime, Kaiko suggests two ways in which an ETF could trigger Bitcoin’s liquidity: liquidity transmitted through trading and liquidity transmitted through market makers (MMs). According to the report, an ETF could exponentially expand the crypto trader base, leading to larger volumes and more efficient markets. Additionally, it is mentioned that market makers could potentially expand their operations due to the fencing provided by ETFs.

However, Kaiko also underscores concerns about significant ETF outflows creating selling pressure on underlying markets. Furthermore, market makers may respond by applying higher spreads due to an influx of informed traders. This dichotomy sets the stage for a critical examination of Bitcoin’s current liquidity situation.

Overcoming Challenges and Seizing Opportunities

Bitcoin’s market depth experienced a significant decline after the FTX collapse. Additionally, while the recent market rally marginally impacted liquidity, it is mostly attributed to price effects. Meanwhile, as the approval of the Bitcoin Spot ETF approaches, the significance of market depth becomes apparent. In particular, ETF issuers buying and selling the underlying asset could lead to increased flows on central spot exchanges. Liquidity, crucial for maintaining market efficiency for arbitrageurs, becomes a key focal point in the ETF narrative.

Also, despite being less significant than market depth’s impact on FTX’s trading volume, which echoes the volatility seen since November 2022, the overall volumes remain below pre-FTX levels. The report suggests that ETF approval could shape transaction costs as more knowledgeable investors enter the Bitcoin market.

However, despite ongoing market turmoil, the report notes that Bitcoin has demonstrated resilience as the most liquid crypto asset. Comparing the volume distribution that has not fallen below last year’s levels, BTC consistently outperforms ETH and leading altcoins. Considering all these aspects, Kaiko suggests that an ETF approval could further solidify Bitcoin’s dominance and potentially influence overall market dynamics.