Crypto market liquidity has rebounded to its pre-FTX average, according to recent findings from the crypto research firm Kaiko. The firm’s data indicates that the liquidity gap, often referred to as the “Alameda Gap,” has now recovered to levels seen before the collapse of FTX and Alameda Research in November 2022. This recovery comes after a prolonged period of decreased liquidity following the shutdown, which affected trading volumes and market stability.

Kaiko introduced the term “Alameda Gap” in November 2022, highlighting the drop in liquidity caused by significant losses incurred by market makers during the collapse. The persistence of this gap for over a year underscored the influence of major players in crypto markets during that period.

Bitcoin rally drives recovery

The recent recovery in liquidity can be attributed in part to the rally in Bitcoin prices. Kaiko’s research notes that Bitcoin’s market depth has increased by 40% year-to-date, briefly surpassing its pre-FTX average. This surge in market depth aligns with Bitcoin’s price gains of 60% since the beginning of the year, reaching a new all-time high of $73,750 on March 14.

Additionally, Kaiko reported a decline in BTC/USD spreads on major U.S.-based exchanges, including Coinbase, Kraken, and Bitstamp. This decline suggests that liquidity conditions are meaningfully improving, making trading more cost-effective for investors. The spread reduction could be attributed to structural factors and the increase in overall market liquidity.

Potential challenges ahead

While the recent liquidity recovery is a positive development for the crypto market, potential challenges lie ahead. Earlier this month, concerns were raised about a possible “sell-side liquidity crisis” for Bitcoin if institutional exchange-traded fund (ETF) inflows continue at their previous pace. 

However, daily ETF inflows have slowed considerably recently, dropping below $200 million from previous highs above $500 million. This decline comes after a record $1 billion daily inflow was recorded last week when Bitcoin reached its all-time high.

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