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Ether’s liquidity on US exchanges has fallen by as much as 40% since the first exchange-traded Ether funds came to market on July 23, 2024.
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That’s a move previously expected by traders and analysts who previously saw the ETFs as a means to improve the market liquidity and thereby stabilize prices.
Instead, what has taken place is very different: the average market depth of 5% for ETH pairs has fallen to around $14 million. Meanwhile, offshore exchanges are showing a similar decline with liquidity of around $10 million.
Ether liquidity down
After launching nine ETFs in July Ether’s liquidity plummeted 20% in US markets and 19% in offshore locations.
The drop in liquidity is something that raises concerns and, more importantly, it signals a greater sensitivity to large orders. With shallow market depth, it follows that even small trades can lead to dramatic price changes.
Jacob Joseph, a research analyst at CCData, said liquidity is still better than at the start of the year but has fallen nearly 45% since the peak in June. Poor market conditions and seasonal effects are mainly responsible as the summer months will see less trading activity.
Market dynamics and ETF performance
Its introduction was expected to increase liquidity, just as it had done in the case of the Bitcoin ETFs introduced earlier this year. However, the Ether the market hasn’t responded very well.
In the period since their introduction, Ether ETFs have suffered cumulative outflows of more than $500 million. This has contributed to an overall decline in liquidity, making markets even more volatile.
Surprisingly, ETFs have delivered their own performance. For example, Grayscale’s ETHE ETF witnessed outflows of a whopping $10.7 million, while BlackRock’s ETHA ETF saw inflows of just $4.7 million.
Such mixed results indicate that Ether markets have not yet emerged from their tough times, with investments reflecting investors’ reluctance to deploy capital in uncertain times.
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Implications for traders and investors
A drop in liquidity is actually a challenge for both traders and investors. In states with low liquidity, the slippage is much higher and the execution price is more expensive.
The big problem lies in the fact that institutional investors like a stable market and good liquidity. If these major players cease their entire operations, a kind of vicious circle could emerge where liquidity will be even lower and prices will fall even further.
For now, Ether is trading at around $2,258, down more than 4% in the last 24 hours. The broader cryptocurrency market is also under pressure, with all major altcoins, including Solana and Ripple, in the red and posting losses between 2% and 4%.
Going forward, market participants will find themselves in a position where the expected benefits of ETF launches for Ether have not materialized. With potential rate cuts from the Federal Reserve, the market’s future focus could shift to how these changes will impact liquidity and trading activity in the coming months.
Featured image from Getty Images, chart from TradingView
