Low Trading Volumes, Diminishing Liquidity Spur Bitcoin Price Volatility

Low trading volume and decreasing liquidity have largely spurred bitcoin’s (BTC) recent price volatility.

On Wednesday, the largest cryptocurrency in market value regained its foothold above $28,000 two days after dropping below $27,000 after the Commodities Futures Trading Commission (CFTC) filed suit against exchange giant Binance. Until its Wednesday morning surge, BTC had been seesawing between $26,650 and $27,400 this week.

The price shifting reflects investor uncertainties about inflation, monetary policy and other macroeconomic concerns.

Trading volume is akin to foot traffic in a stairwell, except the movement describes prices, not people.

With buyers moving in one direction and sellers in another, when multiple market participants meet at an agreed price, movement in the stairwell slows.

As market participants move steadily up and down the stairwell in search of a party who agrees to their price, movement on the stairwell is faster.

The same metaphor holds true for total volume. Less volume can lead to rapid movement up and down, while more volume tends toward more orderly price action.

The Volume Profile Visible Range (VPVR) tool shows trading volumes at various price levels. When activity is higher, “high-volume nodes” are formed, indicating areas of significant price agreement and often leading to relatively flat trading ranges.

Bitcoin is currently trading in a “low-volume node” which can partly explain the seesaw movement in prices over recent days.

When there is less agreement among market participants, prices move more erratically. This is especially true when overall trading volume is lower.

Bitcoin trading volume has fallen below its 20-day moving average for the eighth consecutive day. Prices have traded in a 9% range over that time period, with five days lower and three higher. Wednesday’s 4% gain follows near zero movement the day prior.

Liquidity has slowed for bitcoin as well in recent days.

Bitcoin Illiquid Supply, a Glassnode metric identifying the total supply of BTC held by “illiquid entities,” has risen to all-time highs as of March 28. Liquidity measures the extent to which an entity spends the BTC that it receives by calculating the ratio of BTC outflows vs inflows. Ranging from 0 to 1, higher figures indicate an entity that buys and sells BTC on a regular basis, while figures close to 0 indicate an entity prone to never sell bitcoin.

With the decline in recent volumes, an increase in illiquidity, and a lack of price agreement at current levels, crypto investors may continue to see prices move erratically in search of the next price level.