The Crypto Liquidity Concentration Report.

Ever since the FTX collapse, we’ve paid special attention to crypto market liquidity, producing recurring reports such as:

• Crypto Asset Liquidity Ranking
• The State of Liquidity

Today, we present a new liquidity report exploring the concentration of liquidity across exchanges. We believe that this is an important topic as market makers retreat, regulators crack down on exchanges, and volume/volatility hits multi-year lows.

Highly-concentrated crypto markets are both a good and bad thing. There is undoubtedly a shortage of liquidity, which when spread thin across many exchanges and trading pairs can exacerbate volatility and disrupt the price discovery process. Natural market forces have inevitably led to increasing concentration of this liquidity on a handful of platforms, which benefits the average trader.

However, highly-concentrated crypto markets can create points of failure for the industry (ex: the FTX collapse). Many centralized exchanges still lack basic protections for traders in case of failure, hacks, or market manipulation.

By understanding the concentration of liquidity at a global scale, we hope traders and market makers can make more informed decisions on where to deploy capital.

The Data

We are able to explore liquidity at the exchange-level thanks to our new data product, Asset Liquidity Metrics. This product massively simplifies the process of aggregating trade and order book data across the 100+ exchanges that Kaiko covers.

For example, if I’m interested in BTC market depth and volume, I can quickly pull aggregated liquidity data – which would include BTC-USDT on Binance, BTC-TUSD on OKX, BTC-KRW on Upbit, and 200+ other instruments – since the token was first listed, all converted into USD and broken down by exchange.

For this report, we compiled average 1% market depth and cumulative trade volume for BTC, ETH, and the top 30 crypto assets by market cap. The vast majority of crypto trading activity is concentrated on these top 30 assets, thus we believe it provides a suitable gauge for measuring exchange-level liquidity.

The Results

Liquidity is concentrated and has become more concentrated over time. In 2023, the top exchange, Binance, has accounted for 30.7% of global market depth and 64.3% global trade volume. The top 8 largest platforms account for a whopping 91.7% of depth and 89.5% of volume.

Since 2021, Binance’s market share of spot volume has increased from 38.3% to 64.3%. It should be noted that a big part of this increase was linked to Binance’s zero-fee trading promotion.

The concentration of market depth has actually fallen for the top exchange, from 42% to 30.7%, which suggests that Binance’s zero-fee trading program had an unequal impact on volume relative to market depth. However, just 8 exchanges still account for more than 90% of global market depth.

Overall, both spot volumes and market depth are heavily concentrated on just 8 platforms, which have stayed pretty consistent over the years.

Market depth

Let’s now take a closer look at market depth. Kaiko’s order book data captures all bids and asks within 10% of the mid price which lets us explore the concentration of liquidity within various percentage ranges. We noticed that since the FTX collapse, .1% market depth, which includes bids and asks within a very tight range, has recovered more than liquidity placed in wider price ranges.

1%, 2%, and 4% depth has stayed mostly flat since November. This suggests that market makers are increasingly supplying liquidity in a tight range.

Altcoin Liquidity Concentration

Let’s now take a closer look at altcoin liquidity, which has taken a particularly hard hit since the FTX collapse. In August, reports emerged that Binance had contacted less liquid token projects asking for details about market makers as part of a risk management initiative. U.S. exchanges have also suffered from regulatory actions and the retreat of several big market makers.

Altcoin liquidity is thus at a premium. When comparing altcoin market depth on U.S. exchanges vs. offshore, we can observe that the concentration on offshore exchanges has increased from 65% to 71% since last year.

Within U.S.-available exchanges, altcoin market depth is heavily concentrated on just three platforms: Coinbase, Kraken, and Bitstamp.

Kraken’s altcoin liquidity has performed particularly well, making it a strong contender with Coinbase. Since August 2022, Kraken has not seen any drop in market depth for the top 30 altcoins, whereas Coinbase has lost ~$5mn in liquidity.

Binance has experienced a drop of more than $10mn year-on-year, which could explain their outreach efforts to token projects. When looking at the concentration of depth among the top 10, 10-20, and 20-30 altcoins, it is clear that the majority of liquidity is supplied to the top 10 altcoins, especially on Kraken.

Conclusion

Liquidity, as measured by trade volume and market depth, is heavily concentrated on just a handful of platforms. Globally, there are hundreds of cryptocurrency exchanges, but many cater for just a niche segment of market activity.

While it may be optimal from a markets perspective to have liquidity concentrated on just a few exchanges, the cryptocurrency industry generally holds decentralization in high regard. When it comes to CEX liquidity, there is little decentralization.