Crypto Traders Flock to OTC Markets as Exchange Liquidity Dries Up
Bitcoin prices briefly spiked to $138,000 on crypto exchange Binance.US earlier today before immediately reverting to normal levels. The sudden price wick was likely due to low liquidity for bitcoin against tether on the exchange, according to market depth data. The move was unlikely to have been caused by a trader wanting to pay a nearly 450% premium for bitcoin, which currently exchanges hands for just over $29,000 in European morning hours on Wednesday. Market depth data shows a $400,000 bitcoin buy on this trading pair can increase prices by 2%, compared to a minimum of $842,000 for the same impact on a bitcoin/USD trade pair. Binance.US's market depth has dropped 76% compared to May, suggesting market makers and traders have fled from the exchange. The bizarre wick is a reminder of the volatility and unpredictability of cryptocurrency markets.Base, the layer 2 blockchain developed by Nasdaq-listed crypto exchange Coinbase (COIN), has completed a series of security audits as it prepares to launch its mainnet with the aim of attracting as many as 1 million new crypto users in coming years. The audits were conducted by Coinbase's protocol security team and over 100 external security researchers to test the blockchain's security and identify potential vulnerabilities. The team used a technique called fuzzing to find implementation bugs and audited all of Optimism's pre-deployments and smart contracts on both layer 1 and layer 2. Cross-chain bridges, which are commonly used attack vectors for hackers and exploiters, were also audited. Base has not provided a date for when the mainnet will go live, but it has said it will not feature a native token unlike other layer 2 blockchains Polygon, Optimism, and Arbitrum. Edited by Sheldon Reback.Crypto traders are turning to over-the-counter (OTC) markets to source elusive liquidity following a regulatory crackdown that has resulted in a substantial decrease in market depth on centralized exchanges. OTC demand has been steadily on the rise since the collapse of FTX in November, with subsequent spikes being attributed to the collapse of several crypto lenders last year and more recently the SEC's decision to sue Binance. Market depth is a metric that measures liquidity by assessing how much capital would be required to move an asset in either direction, typically measured at a spread of 2%. Last month, Jane Street and Jump, two prominent market makers, announced that they were at very least reducing their trading activity, compounding the liquidity woes that had been felt since FTX's collapse. As a result, the OTC market, which allows traders to conduct large transactions without needing to go to an exchange, looks to be becoming more prevalent. We've been receiving a lot more [OTC] demand, spreads are tight due to daily recurring flow we have on both sides from payment providers, brokers and algorithmic traders. This trend is eerily reminiscent of the time after Mt Gox, the largest crypto exchange at the time, got hacked and subsequently ceased operations in 2014. Despite the largest exchange falling, the demand for digital assets continued, with peer-to-peer markets on exchanges like LocalBitcoins emerging as the champions of the 2014 bear market. But as crypto continued to thrust itself into the world of traditional finance, the stature of firms getting involved in the industry began to notably increase. By 2020, counterparties would no longer be an arbitrage trader on LocalBitcoins, and publicly-listed companies like MicroStrategy dealt directly with Nasdaq-listed exchange Coinbase. This week the world's largest asset manager, BlackRock, filed for a spot bitcoin ETF as it attempts to create a secure investment vehicle for funds and trading firms to gain crypto exposure. But until that is approved by the increasingly combative SEC, traders will have to turn back to OTC deals.