Alameda Gap: BTC Price Rise Driven by Bitcoin Liquidity Dearth, High Interest Rates

Key Takeaways

• Since the collapse of FTX, the “Alameda Gap” has left crypto markets suffering from low liquidity.
• Now, Bitcoin market depth has fallen to its lowest level all year.
• High interest rates helped to ensure the Alameda Gap remains open.
• Without sufficient liquidity, a recent increase in demand has spiked the price of BTC.

The data analytics firm Kaiko coined the term “Alameda Gap” to refer to the major drop in liquidity that followed the collapse of the FTX group last year. In the following months, Bitcoin and other cryptocurrencies sailed through some choppy waters, validating the conventional wisdom that lower liquidity leads to volatile market conditions.

By spring, however, the price of BTC had stabilized, and by August, had settled into a period of historically low volatility. But did the Alameda gap ever actually close? Not really. And recent price action has brought the Bitcoin liquidity crunch back into view.

Shallow Bitcoin Market Fuels Price Gains

In September, Kaiko published a report  on liquidity levels in different crypto markets. In general, the firm found liquidity levels were still significantly lower than before the FTX crisis.  Significantly, it noted that “shallow” liquidity within a 1% price range had recovered more than liquidity placed in wider price ranges.

That is to say, the loss of a major market maker like Alameda’s is still being felt nearly a year later, with other liquidity providers still only fulfilling trades within a tight range, creating what is known as a shallow market. And as Bloomberg reported  on Monday, October 30, Bitcoin market depth has now fallen to its lowest point this year.

In periods of low liquidity, any increase in demand for Bitcoin has a much larger effect on its price than it would in a deeper market. 

Now, it appears as if the Alameda gap has once again reared its head, helping to fuel the double-figure daily price swings that have characterized Bitcoin’s latest rally. 

High Interest Rates Impact Crypto Lending Liquidity

While Alameda’s market exit affected a major blow to crypto markets, the high interest rate environment of the past year has suppressed the inflows of capital needed to boost liquidity.

With traditional savings products promising their highest returns in years, decentralized finance options are less attractive in comparison.

What’s more, following the loss of Celsius, Genesis, Voyager Digital, and BlockFi, the crypto sector lost some of its biggest lending platforms, further contributing to the current low liquidity levels

As Trident Digital CEO Anthony DeMartino explained to CCN recently, “After FTX went down, we saw the prices come back at the beginning of this year, but the liquidity is still down.” 

“As the market was recovering, the liquidity was getting worse, and that’s 100% based on access to lending,” he added.