Digital Asset Market Faces a Liquidity Crisis, Glassnode Reports

Stablecoin decline, Bitcoin options, and holder trends signal market uncertainty.

The digital asset market is presently grappling with a substantial liquidity shortage, as both on-chain and off-chain platforms witness historically low trading volumes, the latest report by crypto market intelligence firm Glassnode finds.  

According to the research firm, “the digital asset market has returned to a remarkably narrow trading range, experiencing a regime of compressed volatility, and exceptionally light volumes. All in all, it can be argued that extreme apathy and boredom best describe the prevailing sentiment,” the research states.

This scenario harkens back to the days before the bull market of 2020 when sentiments of indifference and ennui prevailed. One of the primary contributors to this liquidity crisis has been the consistent decline in the supply of stablecoins since April 2022. Various factors, including the Terra ecosystem's collapse and the inability of non-yielding stablecoins to transmit higher interest rates, have played a role in this reduction. Although the beginning of the year saw net capital inflows into Bitcoin and Ether, these assets have since reverted to neutral or negative inflow trends, signaling a state of stagnation and uncertainty in the market.

Among the prominent stablecoins, Tether's USDT has seen a remarkable increase in its supply, surging by $13.3 billion since reaching its low point in November. Conversely, USDC and BUSD have experienced significant declines. The decline in USDC is likely attributed to U.S. institutions diverting capital to higher interest rate markets, while the decline in BUSD could be traced back to issuer Paxos ceasing mints following enforcement actions by the Securities and Exchange Commission. Consequently, Tether's dominance in the stablecoin market has soared to 69%, a substantial jump from the 44% it held in June 2022.

Despite a brief period of market volatility earlier this month, on-chain metrics reveal that the total USD volume of Bitcoin transactions has plummeted to a daily average of $2.44 billion, mirroring levels last witnessed in October 2020. Simultaneously, the off-chain derivatives market has also hit a historic low, with daily trading volume for Bitcoin dropping to $12 billion for the first time since 2022.

Interestingly, there is a notable divergence in the Bitcoin options market, which has experienced a significant surge in trading volumes. This divergence might reflect the market's preference for leveraging the capital efficiency and flexibility of options during times of tightened overall liquidity conditions.

Amidst the prevailing subdued state of the market, long-term holders remain resilient. The cohort of long-term holders, defined as entities holding coins for more than 155 days, has reached an all-time high of 14.7 million BTC. Conversely, short-term holders have dwindled to their lowest levels since 2011. “The Long-Term HODLer cohort remain steadfast, relinquishing very little of their held supply. The Short-Term Holder cohort on the other hand are teetering on the edge of profitability, with many coins holding a cost basis above the current $26k trading range. This suggests that this cohort are increasingly price sensitive, and that many psychological price levels are yet to be overcome,” the researchers predict.

While profitability is gradually on the rise for long-term holders, a noteworthy 26.7% of this supply currently finds itself underwater. Conversely, short-term holders are almost entirely underwater on their positions below the $26,000 price level, leaving this price-sensitive cohort somewhat on edge.