Crypto liquidity trails traditional finance even with improvements in market efficiency

The liquidity in cryptocurrency markets is still behind that of traditional finance due to issues like market fragmentation, differences in technical architecture, and vulnerability to external shocks, as revealed in a fresh analysis from S&P Global.

This analysis examined essential liquidity metrics, including trading volume, bid-ask spreads, market depth, and slippage across both centralized and decentralized exchanges for Bitcoin (BTC), Ethereum (ETH), and major stablecoins.

The findings indicated that while cryptocurrency exchanges are becoming more efficient, they remain fragmented across numerous markets, with liquidity characteristics differing by exchange, trading pair, and the size of the transaction.

Trading volumes for spots on platforms such as Binance still trail significantly behind traditional exchanges like the NYSE, and fiat-based trading pairs consistently show less robust order books than those based on cryptocurrencies.

CEX versus DEX

Centralized exchanges (CEXs) reflect traditional stock markets in their use of order books and custodial models. They provide rapid transaction speeds and minimal spreads for popular stablecoin pairs, particularly for major assets like Bitcoin.

On the other hand, decentralized exchanges (DEXs) allow users to retain custody via automated market makers (AMMs) but may introduce issues like price slippage and impermanent loss, especially during times of high volatility or for large trades.

In spite of these hurdles, certain digital assets, particularly BTC, ETH, and USDT, exhibit bid-ask spreads that are comparable to or even tighter than those of mid-cap stocks such as Broadcom.

Overall, CEXs continue to lead in trading volume and offer greater liquidity compared to decentralized platforms, which instead provide broader access to markets.

The report further indicated that the introduction of Bitcoin and Ether ETFs in the US has spurred trading activity and enhanced liquidity on cryptocurrency exchanges, although the trading volumes for ETFs still lag behind those of the underlying assets.

Challenges in infrastructure

The analysis also pointed out that political instability and security breaches at exchanges can have a pronounced effect on localized liquidity, which is a common concern within the cryptocurrency space.

A political event in South Korea led to a significant 30% decline in BTC-KRW prices on Upbit in December 2024, while a breach at Bybit in February resulted in a sustained drop in ETH trading volume, highlighting the vulnerability of fragmented order books.

The analysis indicated that stablecoin liquidity tends to be higher in crypto-to-crypto transactions compared to fiat pairs, largely due to banking challenges and regulatory compliance issues. However, as these issues are addressed, stablecoins could strengthen their presence in the financial landscape.

Meanwhile, slippage evaluations on Uniswap reveal that low-volatility stablecoin pairs generally maintain near-zero slippage, whereas ETH pairs can display significant fluctuations during sharp price movements.

The report concluded that although liquidity in the crypto market is evolving with the entry of institutional participants and regulated offerings, fragmentation, structural constraints, and variability in market depth still pose challenges for optimal efficiency.