Liquidity

Crypto exchange liquidity, explained

Crypto exchange liquidity hinges on market depth and incentivized trading to ensure robust and stable trading environments.

The ease and speed with which assets can be bought or sold without materially altering their prices is referred to as liquidity in the financial markets.

It’s the ability to swiftly turn an asset into cash without significantly impairing its value. High liquidity indicates a healthy market with plenty of buyers and sellers, which promotes smooth transactions and stable prices. It ensures that investors can profitably enter into or exit positions, reducing transaction costs and the risks of abrupt price swings.

Bitcoin price correction hints start of altseason, trader suggests

BTC price momentum started in October and helped the world’s top cryptocurrency make significant strides, gaining nearly $10,000 in the past month.

The Bitcoin (BTC) price recorded a sharp correction on Dec. 11, dipping 7% and wiping out the gains of the past seven days. The strong price correction pushed BTC to a four-month low of $41,329.

A decline in prices of altcoins followed the Bitcoin price correction, many of which recorded double-digit drops. However, market pundits and analysts believe the recent price crash is a part of the ongoing price cycle, and after two months of bullish surge, a correction is no surprise.

Crypto analyst and co-founder of Reflexivity Research Will Clemente said that correction and market volatility shake out weak hands and cool the highly leveraged crypto markets.

FTX and Alameda transfers another $22M worth of crypto asset

Following their most recent move, FTX and Alameda Research have transferred another significant amount of digital assets, amounting to an impressive $22 million.

Blockchain analysis firm Lookonchain reported that cryptocurrency powerhouses FTX and Alameda Research are actively engaged in a substantial transfer of digital assets, amounting to an impressive $22 million.

Following their bankruptcy declaration, FTX and Alameda Research have actively m aneuvered in cryptocurrency, another bouquet of digital assets, transferring significant amounts to prominent exchanges.

Today #FTX/#Alameda transferred ~$22M assets again, including:

6.26M $IMX($9.12M)
20M $GMT($5.29M)
1,643 $ETH($3.43M)
441,425 UNI($2.69M)
77.77B $SHIB($652K)
102,651 $BAL($389K)
2.24M $LOOKS($261K)
801,893 $WOO($179K) pic.twitter.com/VUqWBiNj5G

— Lookonchain (@lookonchain) December 2, 2023

In their most recent move, a transfer of $10.8 million transpired on platforms such as Wintermute, Binance, and Coinbase. The latest transfer of $10.8 million was spread across eight tokens: $2.58 million in StepN’s GMT, $2.41 million in Uniswap’s UNI, $2.25 million in Synapse’s SYN, $1.64 million in Klaytn’s KLAY, $1.18 million in Fantom’s FTM, $644,000 in Shiba Inu’s SHIB and small amounts of Arbitrum’s ARB and Optimism’s OP.

On Oct. 24, the FTX and Alameda wallets transferred $10 million to a single wallet address, which was later redistributed to Binance and Coinbase accounts.

Report: Ex-FTX execs team up to build new crypto exchange 12 months after FTX collapse: Report

Ripple launches liquidity hub for businesses to bridge the crypto liquidity gap

The liquidity hub aims to offer a pool of liquidity to businesses in addition to Ripple’s popular cross-border payments service called on-demand liquidity.

Fintech firm Ripple has launched its liquidity solution for businesses to bridge the gap between crypto and fiat. Ripple liquidity hub was launched on April 13 after a successful pilot last year.

The service operates as a stand-alone solution in addition to Ripple’s popular cross-border payments service called on-demand liquidity (ODL). This makes it a global liquidity network offering its partners access to payout rails worldwide.

The liquidity hub has been developed from an enterprise point of view to offer digital assets from various market makers, including crypto exchanges and over-the-counter trading desks. When an enterprise partner requires liquidity, it can source it from these large pools of deep liquidity, including United States dollars, Bitcoin (BTC), Ether (ETH), Ethereum Classic (ETC), Bitcoin Cash (BCH) and Litecoin (LTC).

Interestingly, the product launch finds no mention of XRP (XRP), the crypto token issued by Ripple. XRP has been central to most liquidity products and services the fintech firm offers, especially cross-border liquidity services. However, XRP was mentioned among digital assets in the company’s pilot phase.

The omission of XRP from its liquidity pairs could be attributed to the company’s ongoing court battle in the U.S. with the Securities and Exchange Commission.

Ripple claimed its liquidity solution would considerably reduce the cost of operations on high-volume transactions. This is done by optimizing cryptocurrency pricing and liquidity across asset pairs.

The liquidity hub eliminates the need to pre-finance capital positions to source liquidity or conduct transactions. The liquidity service reduces complicated multiplatform administration requirements by enabling organizations to access digital assets in a single place. The services also lock in optimum pricing for digital assets to protect companies from market instability and price swings.

Ripple has made a name for itself in the fintech world for offering various liquidity solutions and cross-border remittance services. Its popular ODL solution has onboarded several banks worldwide to provide cheap remittance services with the help of cryptocurrencies.

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‘Killer use case’: Citi says trillions in assets could be tokenized by 2030

The bank predicts the private equity market to become the most “tokenized” asset class because it is more liquid and can be fractionalized.

Investment bank Citi is betting on the blockchain-based tokenization of real-world assets to become the next “killer use case” in crypto, with the firm forecasting the market to reach between $4 trillion to $5 trillion by 2030.

That would mark an 80-fold increase from the current value of real-world assets locked on blockchains, Citi explained in its “Money, Tokens and Games” March report.

“We forecast $4 trillion to $5 trillion of tokenized digital securities and $1 trillion of distributed ledger technology (DLT)-based trade finance volumes by 2030,” the firm’s analysts said.

Of the up to $5 trillion tokenized, the bank estimates $1.9 trillion will come in the form of debt, $1.5 trillion from real estate, $0.7 trillion from private equity and venture capital and between $0.5-1 trillion from securities.

*Blockchain-based tokenization total addressable market by asset class. Source:* *Citi*

The research suggests that private equity and venture capital funds will become the most tokenized asset class, capturing 10% of its total addressable market, with real estate coming in next at 7.5%.

Private equity markets will likely see faster adoption rates because of their favorable liquidity, transparency and fractionalization properties, the bank said.

KKR, Apollo and Hamilton Lane are three private equity firms that have already set up tokenized versions of their funds on platforms like Securitize, Provenance Blockchain and ADDX.

*If Citi’s bullish estimates are reached by 2030, tokenized assets would still only represent a small share of the total addressable markets. Source:* *Citi*

Citi said that blockchain tokenization would supersede legacy financial infrastructure because it is technologically superior and it provides more investment opportunities in private markets.

“Traditional financial assets are not broken, but sub-optimal as they are limited by traditional systems and processes,” it said. “Certain financial assets — such as fixed income, private equity, and other alternatives — have been relatively constrained while other markets — such as public equities — are more efficient.”

Citi argues that blockchain tokenization negates the need for expensive reconciliation, prevents settlement failures and makes tedious operations ever more efficient:

“What DLT and tokenization offer is an entirely new tech stack that lets all stakeholders do all activities on the same shared infrastructure as one golden source of data — no more expensive reconciliation, settlement failures, waiting for the faxed documents or ‘originals to follow’ by post, or investment choices being restricted by operational difficulty in access.”

The investment bank did, however, acknowledge that there are drawbacks at present, such as a lack of legal and regulatory framework, challenges with building the infrastructure and obtaining a widely followed set of interoperability standards.

Citi also noted that some industry players remain “skeptical” too, particularly in light of the Australian Securities Exchange (ASX) recently scrapping its failed $165 million DLT project in November.

There are many more “growing pains” to come, Citi added. But the bank remains confident that the ecosystem will mature as the technology develops:

“Once this intermediate, skeuomorphic ‘straddle’ state is crossed, the new disruptive technology breaks free from the old and ideally directionally trends towards the envisioned end-state.”

Citi envisions this “end state” as a “digitally native financial asset infrastructure, globally accessible, operating 24x7x365 and optimized with smart contract and DLT-enabled automation capabilities, which enable use cases impractical with traditional infrastructure.”

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Jack Dorsey’s TBD launches C= to improve Bitcoin Lightning Network

C= (pronounced C equals) aims to further the reach of the Bitcoin Lightning Network through added liquidity and routing services.

TBD, a division of Block (formerly Square) led by CEO Jack Dorsey, launched a new venture named c= (pronounced c equals) to improve the Bitcoin Lightning Network through tools and services.

The Lightning Network (LN) is a layer 2 payment network built to ease the mainstream adoption of Bitcoin (BTC) by enabling faster, cheaper and more reliable peer-to-peer payments. However, c= aims to further the reach of LN through added liquidity and routing services.

⚡️hello world. meet TBD’s @c_equals: https://t.co/j5ZYJmtS3J #lightning

— TBD (@TBD54566975) March 2, 2023

Since its launch, the LN’s liquidity and capacity have witnessed organic growth via real-world adoption. In addition, services like c= offer incremental upgrades to support the ongoing Bitcoin adoption globally.

*Visual representation of widespread Bitcoin Lightning adoption. Source: c=*

Through liquidity, services and infrastructure, c= caters to wallet users, businesses and lightning node operators for faster and cheaper payments. The official announcement read:

“We want to meet you where your lightning needs are. Are you a business looking to accept Lightning payments? A wallet in need of channels or inbound for your customers? A hardened plebnet veteran looking for your next big source?”

Layer 2 services collectively improving Bitcoin operations make it easier for people to adopt the ecosystem into their lives. If you want to accept Bitcoin as payment for your services, read Cointelegraph’s guide on how to get paid in BTC.

Jack Dorsey’s popular payments venture Cash App recently integrated crypto tax and accounting software TaxBit into its services. The move allows Bitcoin users an easy way to report taxes.

As Cointelegraph reported, Cash App launched its Bitcoin trading services in 2018 and rolled out BTC deposits the following year. The company claims to have over 10 million Bitcoin users.

US agencies recommend old risk management principles for crypto liquidity

The joint statement highlighted the key liquidity risks associated with crypto-assets and related participants for banking organizations.

In a joint statement released by three United States federal agencies, the banking sector was advised against creating new risk management principles to counter liquidity risks resulting from crypto-asset market vulnerabilities.

The Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a statement reminding banks to apply existing risk management principles when addressing crypto-related liquidity risks.

The joint statement highlighted the key liquidity risks associated with crypto-assets and related participants for banking organizations. The risks highlighted concern the unpredictable scale and timing of deposit inflows and outflows.

In other words, the federal agencies raised concerns about an event where massive selloffs or purchases would negatively impact the liquidity of the asset — potentially incurring losses for investors.

The federal agencies specifically highlighted two instances to showcase the liquidity risks associated with cryptocurrencies:

Deposits placed by a crypto-asset-related entity for the benefit of the crypto-asset-related entity’s customers (end customers).
Deposits that constitute stablecoin-related reserves.

In the first instance, the price stability depends on the investors’ behavior, which can be influenced by “stress, market volatility and related vulnerabilities in the crypto-asset sector.” The second type of risk is related to the demand for stablecoins. The joint statement read:

“Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets.”

While the trio agreed that “banking organizations are neither prohibited nor discouraged from providing banking services” as per the law of the land, it recommended active monitoring of the liquidity risks and establishing and maintaining effective risk management and controls over crypto offerings.

The agencies recommended four key practices for effective risk management to banks, which include performing robust due diligence and monitoring of crypto assets, incorporating the liquidity risks, assessing interconnectedness between crypto offerings and understanding the direct and indirect drivers of the potential behavior of deposits.

On Jan. 3, the same three federal agencies — the Fed, FDIC and OCC — issued a joint statement highlighting eight risks in the cryptosystem, including fraud, volatility, contagion and similar issues.

The agencies jointly stated:

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”

The statement highlighted the possibility of changing crypto regulations with references to agencies’ “case-by-case approaches to date.”

DeFi ‘fragility’ causes and cures explored in highly technical Bank of Canada study

Researchers affiliated with Canada’s central bank identified weak points in DeFi lending protocols and reported on the potential they saw for mitigating them.

The Bank of Canada has released a working paper that examines lending protocols in decentralized finance with regard to sources of instability and their relation to crypto asset prices. Its findings point to potential ways to optimize DeFi lending platforms, or possibly the practical limits of decentralization.

The authors of the paper, titled “On the Fragility of DeFi Lending” and released Feb. 22, acknowledge the inclusiveness DeFi offers and the advantages of smart contract protocols over the use of human discretion — but they also identify the systemic weaknesses of DeFi. Information asymmetry, a key issue for regulators, is highlighted, with the twist that in DeFi, the asymmetry favors the borrower:

“The collateral composition of a lending pool is not readily observable, implying that borrowers are better informed about collateral quality than lenders are.”

This is because borrowers are at least aware of the quality of the assets they used as loan collateral. Moreover, “Only tokenized assets can be pledged as collateral, and such assets tend to exhibit very high price volatilities.” Price and liquidity produce a feedback loop, the paper argues, saying that the price of an asset affects borrowing volume, which, in turn, affects asset price.

In addition, smart contracts’ lack of human input can have undesired effects. Traditional loan contracts can be modified by loan officers in response to current information. However, smart contracts are inflexible because terms are preprogrammed and “can only be contingent on a small set of quantifiable, real-time data,” and even minor changes to the contract can require a lengthy discussion process.

“As a result, DeFi lending typically involves linear, non-recourse debt contracts that feature over-collateralization as the only risk control.”

Efficiency, complexity and flexibility are thus reduced in comparison with traditional finance, and “self-fulfilling sentiment-driven cycles” of pricing arise. The authors used advanced mathematics to examine a number of propositions for achieving market equilibrium in those circumstances.

A flexible optimal debt limit was found to provide equilibrium. However, “simple linear haircut rules” typically designed into smart contracts cannot implement a flexible limit. It would be hard to create protocols with that feature, and they would be highly dependent on the choice of oracles. Alternatively to that challenge, “DeFi lending could abandon complete decentralization and re-introduce human intervention to provide real-time risk management.”

Thus, the authors conclude, the DeFi trilemma of decentralization, simplicity and stability remains unconquered.

Interesting new study from the Bank of Canada on “the Fragility of DeFi Lending” https://t.co/BqnjIxnelB

— Ryan Clements (@ryanjclements) February 22, 2023

Proof of Stake Alliance publishes white papers on legal aspects of liquidity staking

Experts from 10 industry organizations contributed to this pioneering examination of legal questions surrounding proof of stake.

The Proof of Stake Alliance (POSA), a nonprofit industry alliance, has published two white papers examining on the status of deposit tokens in United States securities and tax law on Feb. 21. The papers were authored by representatives of over 10 industry groups.

Liquid staking is the practice on blockchains using a proof-of-stake consensus mechanism of issuing transferrable receipt tokens to show ownership of staked crypto assets or rewards accrued for staking. The tokens are often referred to as liquid staking derivatives, which is a term the POSA objected to as being inaccurate, recommending that they be called liquid staking tokens instead. Liquid staking has seen a surge of interest since the Ethereum Merge.

Neither the U.S. Treasury nor the Internal Revenue Service have issued guidance on liquid staking, the POSA noted in “U.S. Federal Income Tax Analysis of Liquid Staking,” but it should be subject to capital gains tax rules under general principles. The paper said:

“Receipt Tokens evidence ownership of intangible commodities in the digital world in a substantially identical manner that warehouse receipts, bills of lading, dock warrants and other documents of title evidence title to tangible commodities in the physical world.”

In line with capital gains taxation, the argument continued, “a liquid staking arrangement will be a taxable event only if there is a sale or other disposition of cryptoassets in exchange for property that differs materially in kind or extent,” which is standardly referred to as “realization” of an asset.

That reasoning is supported with an argument that a liquid staking protocol (smart contract) should not be considered a separate entity, as it lacks a second party that shares in the profits. “If a Liquid Staker does not have a taxable event as discussed above, the Liquid Staker must then grapple with the taxation of its continuing ownership of the staked cryptoassets,” it concludes.

In “U.S. Federal Securities and Commodity Law Analysis of Staking Receipt Tokens,” the POSA said that determining whether or not a receipt token is an investment contract is a gating issue.

1/ Excited to see the launch of the @team_Posa Liquid Staking White Papers. 18 months ago our goal was to bring together the leaders in the staking space to tackle some of the biggest unknown regulatory and tax issues that could hamper liquid staking adoption. https://t.co/O77MpMPF3i

— Evan Weiss (@evweiss1) February 21, 2023

It argued that liquid staking is not an investment contract, and therefore not a security, using a case-based analysis of the well-known Howey test. Then it examined all four prongs of the Howey test and concluded that the tokens generally do not meet any of them.

The paper also considers the Reves test, from a 1990 Supreme Court ruling that determined when an instrument constituted a “note” based on its “family resemblance” to an investment contract. The SEC and federal courts have found some crypto assets to be notes. Further, the paper argued a receipt token is not a swap under the Commodity Exchange Act.

A receipt token serves security purposes, allowing the holder to transfer ownership of staked funds between wallets in the event of a compromised key, and commercial purposes, similarly to warehouse receipts, the paper concludes.

The papers were intended to offer “a framework for meaningful legislative codification or elucidation,” according to an accompanying statement. They also were meant to provide a basis for self-regulatory standards.

72% of institutional traders are crypto-skeptical this year: JPMorgan

Of 835 institutional traders surveyed by JPMorgan, only 14% said they would either keep trading crypto in 2023 or had plans to do so this year.

A whopping 72% of institutional e-traders have signaled “no plans to trade crypto/digital coins” in 2023, according to a new survey conducted by JPMorgan.

The seventh edition of JPMorgan’s e-Trading Edit surveyed 835 traders from 60 different global locations about the technical developments and macroeconomic factors that will influence trading performance in 2023.

The survey revealed hesitation among traders around digital assets. Only 14% of respondents said they will either continue to trade in the digital asset market or begin trading this year.

The remaining 14% of respondents said they didn’t plan on investing this year but may do so within the next five years.

The overwhelming majority of the institutional traders surveyed by JPMorgan — 92% —said they didn’t have any exposure to the digital asset market in their investment portfolio at the time of the survey, which was conducted from Jan. 3 to Jan. 23.

*Nearly three-quarters of institutional traders don’t plan on touching the digital asset market in 2023. Source:* *JPMorgan*

This may be due to the fact that nearly half of the respondents cited volatile markets as the biggest challenge to perform well on a day-to-day basis.

The quantitative tightening measures imposed by the United States Federal Reserve in 2022 may have played a factor too, with 22% citing liquidity availability concerns as the most influential factor impeding trading performance.

The survey results come just months after investor and trader sentiment in the cryptocurrency market dipped following the catastrophic collapses of the Terra (LUNA) ecosystem and trading platform FTX in 2022.

In another JPMorgan poll, 30% of respondents cited recession risk as the most influential macroeconomic factor to look out for, while 26% believe inflation will most influence trading outcomes.

It should be noted that trading typically refers to jumping in and out of stocks or assets within weeks, days and even minutes with the aim of short-term profits, while investors have a longer-term outlook.

Last year, an institutional investor survey sponsored by crypto exchange Coinbase found that 62% of institutional investors had invested in the digital asset market from November 2021 to late 2022, seemingly undeterred by the prolonged crypto winter.

A more recent study, in June, also found that 71% of high-net-worth individuals have already invested in cryptocurrencies, while many others are adopting longer-term strategies rather than trading on a day-to-day basis.

In a separate finding, the survey found that 12% of traders saw blockchain technology as the most influential technology to shape the future of trading, compared to 53% for artificial intelligence and machine learning-related technologies.

These figures are in stark contrast to 2022’s poll, where blockchain technology and AI each received 25% of all votes.