Crypto Liquidity Lags Traditional Finance Despite Improvements

Crypto liquidity continues to trail behind traditional finance despite improvements in market efficiency, according to a recent report from S&P Global. The study delved into key liquidity metrics, including volume, bid-ask spreads, market depth, and slippage, across both centralized and decentralized trading platforms for Bitcoin (BTC), Ethereum (ETH), and major stablecoins.

The report revealed that while crypto trading platforms are becoming more efficient, they remain fragmented across numerous markets. This fragmentation results in varying liquidity profiles depending on the exchange, asset pair, and trade size. Spot trading volumes on major exchanges like Binance still pale in comparison to traditional venues, and fiat-based trading pairs consistently exhibit shallower order books compared to crypto-native pairs.

Centralized exchanges (CEXs) operate similarly to traditional stock markets, relying on order books and custodial accounts. They offer high speed and low spreads, particularly for popular stablecoin pairs and large-cap coins like Bitcoin. In contrast, decentralized exchanges (DEXs) allow users to maintain custody through automated market makers (AMMs) but introduce challenges such as price slippage and impermanent loss, especially during volatile periods or large trades.

Despite these challenges, some digital assets, particularly BTC, ETH, and USDT, show comparable or even narrower bid-ask spreads than mid-cap equities. Overall, CEXs continue to dominate the market in terms of volume and provide higher liquidity compared to their decentralized counterparts, which offer deeper access.

The launch of Bitcoin and Ether ETFs in the US has increased trading activity and deepened liquidity on crypto exchanges, though ETF trading volumes remain smaller than their underlying assets. However, political instability and exchange hacks can significantly impact localized liquidity, as seen in a 30% drop in BTC-KRW pricing on Upbit during a political crisis in South Korea and a sustained decline in ETH trading volume following a breach at Bybit.

Stablecoin liquidity remains higher in crypto-to-crypto trades than in fiat pairs due to banking hurdles and compliance friction. However, their growth combined with easing regulations could enforce their role in finance. Slippage analysis on Uniswap shows that low-volatility stablecoin pairs maintain near-zero slippage, while ETH pairs can show high variation, especially during sharp price moves.

According to the report, while the crypto market liquidity is maturing with the entry of institutional investors and regulated products, fragmentation, design limitations, and inconsistent depth continue to hinder full-scale efficiency. The report underscores the need for further integration and standardization to bridge the gap between crypto and traditional finance.