Crypto's Liquidity Engine Breaks Down With $5-Billion ETF Exodus

Bitcoin is struggling to turn recent good news into a substantive rebound, highlighting the ongoing weakness and thin liquidity in digital asset markets that have played a role in keeping prices subdued.

The largest cryptocurrency dipped below $90,000 on Tuesday in early Asia hours and later fought to stay comfortably above that mark. It was trading little changed at around $90,500 in in New York hours, while Ether, the second largest token, was steady at around $3,100.

Sentiment has struggled to pick up despite a string of supportive signals from regulators and large companies in recent days. The US Commodity Futures Trading Commission on Monday cleared Bitcoin, Ether and stablecoin USDC as eligible collateral for derivatives trades, while Michael Saylor’s Strategy Inc. made its biggest Bitcoin purchase since July. Last week Vanguard opened access to crypto funds on its platform. 

Still, the market is struggling to move past the shock of Oct. 10 when a flash crash in digital asset prices saw more than $19 billion of crypto bets liquidated in a matter of hours.  

In a sign that digital assets remain under strain, spot trading volumes across tokens on major exchanges have fallen 66% since their January highs, according to data provider Kaiko. Similarly, market depth — the market’s capacity to absorb large trades without suffering big price swings — has fallen roughly 30% from this year’s high for both Bitcoin and Ether.

The muted activity and shallow market depth are in turn keeping new money on the sidelines, creating a loop that is keeping liquidity thin and prices lower.

“The virtuous ‘liquidity begets liquidity’ cycle has been broken since the market drop on Oct. 10,” said Le Shi, Hong Kong managing director at market maker Auros. “This is a chicken-and-egg problem,” Shi said. “Institutions want credible support levels before re-engaging, but their lack of participation itself decreases incentives for the very liquidity they’re looking for. Likewise, retail is also looking for signs of life via a credible narrative or bullish price action before jumping in again.”

US-listed Bitcoin ETFs — which helped propel the token’s price after their debut last year — have seen over $5.2 billion in net outflows since Oct. 10, while Ether funds have shed more than $2 billion.

The recent malaise has left Bitcoin decoupled from the broader risk rally. The token is down about 3% this year, while the S&P 500 is up more than 16%. On-chain dynamics are adding to the drag, according to Arthur Azizov, founder of B2 Ventures. 

“A large share of Bitcoin is currently held at a loss, so each move toward $96,000–$100,000 meets selling from holders who want to exit at break-even,” Azizov said. “I see an idling, maybe even stagnating market.”

Speculative positioning remains muted as traders shy away from rebuilding leverage after October’s liquidations. 

“The fear of sudden liquidation remains unresolved, keeping speculative positioning suppressed at a time when bullish catalysts are needed most,” said Samer Hasn, a senior market analyst at XS.com. 

Investors are focusing on the Federal Reserve’s interest rate decision on Wednesday, with Fed futures pricing in a 90% chance of a rate cut. Markets aren’t pricing another until June, leaving scope for repricing if Chair Jerome Powell strikes a more dovish tone.

“We believe there’s some room for upside here should the Fed signal that there is potential for another cut before the June meeting,” said Mark Pilipczuk, an analyst at CF Benchmarks. “That becomes more likely if the labor market continues to soften and inflation expectations stay in the 2-3% range.”

A clear signal from the Fed may be the next major catalyst for direction. If Powell validates expectations of easing, Bitcoin could attempt a move back into the $93,000–$95,000 zone, said Timothy Misir, head of research at digital asset analytics firm BRN. A hawkish surprise risks a return toward $88,000 “with high velocity,” he said.