Crypto traders turn to OTC markets due to regulatory clampdown causing exchange liquidity to dry up.
Crypto traders are turning to over-the-counter (OTC) markets to find liquidity due to a regulatory crackdown that has caused a significant decrease in market depth on centralized exchanges. OTC demand has been increasing since the collapse of FTX in November, with spikes being attributed to the collapse of several crypto lenders last year and the SEC’s recent decision to sue Binance. The catalyst for this demand has been the sharp drop in market depth across exchanges, with Jane Street and Jump announcing they were reducing their trading activity, compounding the liquidity woes felt since FTX’s collapse. Market depth on exchanges slid over 50% between November and May. It emerged this week that market depth on Binance.US had plunged by over 76%. This means traders looking to execute larger transactions will have to deal with slippage as order books remain thin. As a result, the OTC market, which allows traders to conduct large transactions without needing an exchange, is becoming more prevalent. This trend is similar to the time after Mt Gox was hacked in 2014. Despite the largest exchange falling, the demand for digital assets continued, with peer-to-peer markets on exchanges like LocalBitcoins emerging as the champions of the 2014 bear market. Until the SEC approves BlackRock’s spot bitcoin ETF, traders will have to turn back to OTC deals.