Key Takeaways
- Nearly $24 billion of stablecoins have left exchanges since FTX collapsed last November
- The total marketcap of stablecoins has dipped $16 billion in that time
- Liquidity continues to fall in the crypto space, with capital moving elsewhere despite rising prices
- Strict regulatory climate in the US, high yields in trad-fi and uncertainty may be contributing to the pattern
Crypto prices have risen since the start of the year, but capital continues to flow out of the space. Last week brought the news that two prominent market makers, Jane Street and Jump Crypto, were scaling back operations in the US amid the continued regulatory crackdown on the sector.
For markets that have already been suffering from thin liquidity since the Alameda insolvency last year, the news amounts to the latest blow. While rising prices may have brushed the problem under the carpet for the time being, Bitcoin markets getting drained of capital is undoubtedly a hurdle that needs to be overcome for an asset that has ambitions of establishing itself in the mainstream.
Indeed, with liquidity so low, prices have been able to move up more rapidly, with less capital needed to shift the shallow order books on exchanges. In the short-term, this has been a boon. As inflation has come down and forecasts around the future path of interest rates have softened in the last six months, crypto has thus surged upward with less resistance in its way, Bitcoin expanding over 60% this year.
In the long-term, however, this is not a bullish development. Thin liquidity means amplified moves downward as well as upward. And looking at the regulatory climate, things only seem to be getting worse for crypto firms based in the US, which happens to be the centre of the financial world.
The SEC is on a warpath with the entire entire industry, clapping back at accusations that it is the lack of regulatory clarity that is causing so many issues, but rather “mass non-compliance” on the part of crypto firms.
The money is talking. We have discussed the recent announcements of market makers, but a glance at the liquidity on exchanges also reveals the capital flight that is occurring. This week, the total balance of stablecoins on exchanges dipped below $20 billion. At the start of the year, that figure read $37.7 billion. When FTX fell in November, it was $43.5 billion.
We have published research on this exodus before. But the flood shows no sign of drying up, and we are now at a place whereby 55% of the stablecoins on exchanges have departed since FTX and Alameda went poof in November.
This 55% outflow represents a funnelling out of nearly $24 billion, a massive chunk when considering the entire stablecoin market cap is currently only $130 billion. Interestingly, the market cap was $146 billion when FTX went down, meaning the total stablecoin drawdown has “only” been $16 billion.
This suggests stablecoins are being moved elsewhere in the blockchain world, as well as fleeing the crypto space altogether. But with T-bills yielding an easy 5% while the regulatory climate around crypto continues to worsen, it is not a surprise to see investors’ heads turned. When considering the fear around custody of assets after FTX collapsed, and the fact the macro climate remains uncertain, this makes more sense again.
Whatever happened, the main point here is that liquidity in the crypto space continues to be drained. Most order books are as shallow as they have been in over two years, and Bitcoin’s volatility remains high (even with the last couple of weeks feeling relatively serene, Bitcoin has still dropped 12%). As for other cryptos, the effect is even more pronounced. If this liquidity issue doesn’t change, crypto will have a tough time establishing itself as a force on the mainstream stage.