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

important point

  • Prominent Crypto Market Makers Jane Street and Jump Crypto Are Shrinking Their Crypto Businesses
  • The decision comes as US regulators continue to crack down on the sector aggressively.
  • Cryptocurrency liquidity is already tenuous, and these moves will only further reduce liquidity and increase volatility, writes our head of research Dan Ashmore.

It was earlier this week that I wrote piece About Institutions Abandoning Cryptocurrencies. In the days that followed, things got even worse.

Bloomberg reported Tuesday that market makers Jane Street and Jump Trading are reducing their focus on cryptocurrencies. While not exiting the sector entirely, the report says the companies will tap into smaller markets than before.

This is a major blow to an already illiquid cryptocurrency market since market-making giant Alameda died with FTX in November.published a work last week While analyzing the outflow of stablecoins from exchanges ($22 billion on the way to exit in 5 months), orderbooks have been in the balance since Sam Bankman-Fried’s party trick was revealed depth is surprisingly shallow.

Its liquidity is about to get even worse. Less liquidity means more volatility because less money is needed for price movements.Therefore, when the move to both the upside and the downside gets worse, I analyzed in April When Bitcoin price, volatility and profit levels all hit their highest since June 2022.

Investors should be aware that despite price increases over the past six months, there has not really been any positive outcome from the sector. Quite the opposite, in fact, bankruptcies increased in January amid the continued impact from FTX, but regulators have tightened their grip since then.

Above all, prices are rising as the cryptocurrency market soars. very strong correlation Similar to the stock market and other risky assets. Risky assets are rebounding as market expectations about the future rate rise path recede, which means crypto assets are also recovering.

This low liquidity is only going to get worse and the movement will only get more volatile. As of Friday morning, Bitcoin is trading at $26,200, down 7% in the last 36 hours.

Regulators put pressure on the cryptocurrency sector

Jane Street and Jump Crypto are under increasing scrutiny as US regulators continue to crack down aggressively on the sector. Since the collapse of FTX in November, the regulatory environment has become much more hostile to the crypto industry.

Ironically, Sam Bankman-Fried worked at Jane Street before founding Alameda in 2017. Former Alameda CEO Caroline Ellison, who reportedly defied Bankman-Fried ahead of her trial, also worked at Jane Street before joining Alameda.

Jane Street was cited in a lawsuit against Binance by the Commodity Futures Trading Commission as an example of a US company being able to access its platform despite Binance’s claim that it prohibited it. was one of the companies

Jumpstreet was a big backer of Terra, the company that runs the TerraUSD stablecoin and sister coin LUNA, which went to zero in May 2022. The company was questioned by US prosecutors in a post-demise investigation.

The crackdown has been controversial, accusing crypto-native companies of needing to move their activities offshore. Coinbase CEO Brian Armstrong was one of the most high-profile speakers to channel this sentiment, saying this week that Coinbase will consider the UAE as an international hub as the US continues to turn the screw.

The exchange recently received a Wells notice from the SEC warning of impending legal action likely related to securities law violations.

In a blog post, Coinbase said, “Cryptocurrencies and the Web3 present significant opportunities for economic and technological diversification for the UAE, making the region a strategic hub for Coinbase with the potential to expand our efforts around the world. there are,” he said.

Others, on the other hand, applaud what they see as a long-awaited squeeze on a sector dominated entirely by greed that has cost many retail investors bone-crushing losses over the past year. . Whatever your view, it is clear that the United States is creating an increasingly hostile environment for companies operating in the crypto space.

What’s next for cryptocurrencies?

Now, cryptocurrencies appear to be making their way beyond the United States without a choice of their own. The industry can continue, but it will still be a big hit. Much of the steep trajectory of cryptocurrencies during the pandemic was based on the idea that institutions and traditional finance would inevitably flow into the sector. Today it’s going in reverse.

The United States is the economic and financial center of the world. The exclusion of cryptocurrency companies from the market does not completely prevent the general public from investing in the industry, but it does make it more difficult and less convenient to invest. It will also limit innovation in this area. All of this is bearish for the sector and will undoubtedly hamper future growth.

In terms of price implications, the withdrawal decisions of Jane Street and Jump Crypto are hitting a liquidity area that the industry has already struggled with. Therefore, volatility in this sector will not disappear anytime soon, but will only increase.

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