Crypto Global Bid and Ask Metric Plunged 20% Over Weekend, Points to Paper Thin Liquidity

A key metric tracking the crypto market liquidity tanked sharply over the weekend, leaving paper-thin order books that could amplify price swings.

Crypto research firm Hyblock Capital's global bid and ask indicator, which aggregates the dollar amount of resting bid and ask orders for more than 1,100 coins listed worldwide, fell by 20% across spot markets on Saturday.

The sharp decline happened as alternative cryptocurrencies like SOL, MATIC, DOGE and others crashed amid rumors of a fund liquidating its coin holdings.

According crypto hedge fund Assymetric's CIO Joe McCann, some market makers likely pulled out from the market during the altcoin crash, causing a sharp decline in the amount of resting bid and ask orders.

"The @hyblockcapital Global Bid/Ask metric dropped a full 20% during the collapse. Seems like a bunch of MMs [market makers] pulled inventory creating paper-thin order books," McCann tweeted. Other observers argued that the decline in liquidity stemmed from a single market maker running out of collateral.

Thin liquidity means traders might struggle to execute large orders at stable prices. It also means a bunch of small orders can have an outsized impact on the going market rate.

The order book lists all outstanding orders and quotes in a particular financial instrument posted by market makers and other market participants. The bid is the highest price the user is willing to pay to buy the instrument, while the ask or offer is the lowest price at which someone is willing to sell the instrument. A resting order is a limit order to buy at a price below or to sell at a price above the going market rate.

Market makers are entities responsible for creating bid and ask orders and providing liquidity to an order book.

The green line represents the dollar amount of resting bid orders and the red indicates the resting ask orders. Both collapsed over 20% to under $500 million during Saturday's Asian hours.

The decline in liquidity means the market could see above-average volatility following the U.S. inflation data release and the Federal Reserve rate decision. The U.S. consumer price index is scheduled for release on Tuesday at 12:30 UTC and the Fed is expected to maintain a status quo in policy rates on Wednesday at 18:00 UTC, per Reuters data from FXStreet.