Crypto liquidity falling as market makers pull back from hostile US market

Key Takeaways

• Jane Street and Jump Crypto, two prominent crypto market makers, are scaling back crypto operations
• The decision comes as US regulators continue an aggressive clampdown on the sector
• Liquidity is already thin in crypto, and these moves will only drop it further and increase volatility, writes our Head of Research, Dan Ashmore  

It was just earlier this week that I wrote a piece about institutions abandoning crypto. In the couple of days since, it has got worse. 

Bloomberg reported Tuesday that market makers Jane Street and Jump Trading are reducing their crypto focus. While not pulling out of the sector completely, the report stated the duo will be market making at a smaller scale than previously.

This is a big blow for crypto markets which were already showing thin liquidity since market making giant Alameda evaporated alongside FTX in November. I published a piece last week analysing the outflow of stablecoins from exchanges ($22 billion has headed for the exit doors in five months), while order book depth has been alarmingly shallow ever since Sam Baankman-Fried’s party tricks were revealed. 

That liquidity is about to get even worse. With lower liquidity comes greater volatility, as less capital is required to move prices. Thus, moves to both the upside and downside are exacerbated, something I analysed in April when the Bitcoin price, volatility and profit levels all reached their highest marks since June 2022. 

Investors need to be wary that, while price has been rising the last six months, there has not really been anything positive coming out of the sector. Quite the opposite, in fact – bankruptcies picked up in January amid the continued fallout from FTX, while regulators have put the squeeze on since. 

More than anything, prices have been rising as crypto markets are so strongly correlated with the stock market and other risk assets. As market expectations around the future path of interest rate rises have peeled back, risk assets have rebounded – and that means crypto, too. 

With this low liquidity only getting lower, the moves will only become more volatile. As of Friday morning, Bitcoin is trading at $26,200, down 7% in the last 36 hours. 

Regulators squeezing the crypto sector

Jane Street and Jump Crypto faced increasing scrutiny as US regulators continue to clamp down aggressively on the…