Nov 21, 2022
'Alameda Gap' seen drying up liquidity across crypto markets
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The wipeout of Sam Bankman-Fried’s crypto empire, including its crown jewel FTX exchange and sister trading desk Alameda Research, is helping to reduce liquidity across the crypto market.
The decline has been dubbed the “Alameda Gap” by blockchain-data firm Kaiko, named for the trading group at the center of the storm which is closing its books. Plunges in liquidity usually come during periods of volatility as trading shops pull bids and asks from their order books to better regulate risks, Kaiko noted in a Nov. 17 newsletter.
“The Alameda Gap in liquidity could be here to stay, at least in the short term,” wrote the analysts.
These market makers fulfill an especially valuable role in the liquidity-sensitive crypto space by buying and selling coins. But as they turn more conservative in times of crisis, that results in thinner liquidity where users have greater difficulty buying or selling an asset, which in turn makes the market more volatile, said Hank Huang, chief technology officer at Kronos Research.
“Market makers are shutting off or getting funds into a safe place first,” added Tiantian Kullander, co-founder of Singapore-based crypto trading platform Amber Group, adding that they’re “awaiting the storm to pass.”
Bankman-Fried’s bankrupt crypto empire owes its 50 biggest unsecured creditors a total of US$3.1 billion, court papers released Sunday show, with a pair of customers owed more than US$200 million each. The creditors, whose names and locations weren’t disclosed, are among the vast array of people and institutions caught up in FTX’s insolvency.
Kaiko measures the market’s liquidity by calculating the quantity of bids and asks within 2 per cent of the mid-price for one token’s trading pairs on exchanges. The metric for Bitcoin trading pairs denominated in US dollars and Tether across centralized exchanges dropped to its lowest level since early June, Kaiko said in a Nov. 11 report.
To be sure, some market makers have pointed out that the impact of Alameda winding down its business is not as severe as FTX’s collapse, as both Amber and Kronos’s Huang said they noticed Alameda had not been as active market-making recently. Its biggest impact may have been on the Solana ecosystem, where it was a major backer of the protocol.
In fact, some of the biggest crypto market makers remain active, despite being affected by FTX’s meltdown.
Chris Zuehlke, global head at Cumberland -- the crypto offshoot of trading giant DRW -- said that his firm saw “a pretty big uptick” in trading activity, as its exposure to FTX was limited to under US$10 million.
Other large market makers have also disclosed their exposure to FTX, including Jump Crypto, the digital-asset division of Jump Trading, and London-based trading shop Wintermute.
Zuehlke added that one positive outcome of the FTX fallout is that large market players could soon change the process for how they determine whom to trade, lend and borrow with.
“The crypto industry, the news and assets all inherently move at a higher velocity than you’ve seen in traditional markets,” he explained. “And I think in order to operate effectively and efficiently in that environment, you need to develop policies and procedures on the risk-management side that take all that into account.”
Meanwhile, there has been an increase in activity on major decentralized exchanges, with total volume surging by more than 45 per cent in the past 30 days, according to data from DefiLlama.
“A lot of the market makers themselves are even more interested in DeFi,” said Antonio Juliano, founder and CEO of decentralized exchange dYdX. “I do think it’s going to be directionally positive long term.”
Cold storage wallets and decentralized exchanges are likely to be the big winners here, notes Kaiko. “I say should because history has shown us investors have short memories, repeating the same mistakes over and over,” wrote the analysts.