Bitcoin Liquidity on the Brink as Market Makers Pare Back in Crypto Markets

The apparent exit or reduction in trading by Jane Street and Jump Crypto, two influential cryptocurrency market makers, has the potential to disrupt the fragile flow of liquidity across the industry, an analyst at Kaiko told CoinDesk.

Jane Street and Jump are paring back crypto trading in the U.S., Bloomberg reported Tuesday, amid the regulatory clampdown that spawned out of FTX's collapse in November. Jump's crypto division will continue to expand globally while Jane Street will scale back on its growth plans, Bloomberg reported.

"The news is not necessarily surprising given recent developments," Kaiko analyst Riyad Carey told CoinDesk. "What's concerning is that liquidity has still not recovered from Alameda's collapse, and a slowdown with two of the biggest surviving market makers could weigh on liquidity even further. It's a bit surprising how slow the industry has been to fill Alameda's shoes."

Market depth, a metric used to measure liquidity on exchanges by assessing how much capital is required to move a market, slumped by more than 50% following the collapse of FTX and has failed to recover despite a rise in crypto prices.

Crypto-native market makers, unlike traditional firms such as Jane Street and Jump, aren't put off by the duo's exodus as the issue is constrained to the U.S. market.

"Not a big impact yet," Zahreddine Touag, Head of Trading at Paris-based market market Woorton, told CoinDesk. "In the short term, some exchanges will be less liquid but more importantly it will be more difficult for US counterparties to source OTC liquidity."

"We might see it in the future if brokers, payment providers and other actors looking to source liquidity start shifting offshore or to Europe and Asia," he added.

The United States' gung-ho stance on crypto regulation has already attracted criticism from the likes of Coinbase CEO Brian Armstrong, but the long-lasting effects are potentially far greater than any short-term tremble.

An absence of liquidity, which is what the crypto industry will experience as several market makers jump ship, causes an increase in volatility as it takes less capital to move an asset. This, coupled with this highly-leveraged nature of crypto markets, has the potential to create a credit risk that could spread to all sectors of finance.