Will Bitcoin ETFs Be the Key to Restoring Crypto Liquidity Pre-FTX?

• Market looking forward to Bitcoin Spot Exchange Traded Funds (ETFs) potentially boosting Crypto Liquidity to pre-FTX levels 
• Although it is uncertain whether an approval will be recorded next year, new research shows that ETF approvals could change current liquidity levels. 

Bitcoin Spot Exchange Traded Funds (ETFs) are expected to have a major impact on the entire cryptocurrency industry.

Market players are hopeful that the ETF-Product brings about a handful of positive developments to the market. In addition to this, many key figures are on the lookout for the cryptocurrency market liquidity to return to levels recorded before the collapse of the FTX exchange.

Before the collapse of the FTX cryptocurrency exchange the cryptocurrency market boasted of increased market liquidity. An increase in market liquidity usually means that assets have a high trading volume.

However, according to data from market data provider Kaiko, since the FTX collapse, volumes and order book depth for all assets have dropped significantly in all exchanges. The situation has failed to improve despite the recent market. As Kaiko explained, liquidity depths and volumes have yet to return to pre-FTX levels.

Market depths are particularly important in the context of ETFs, as ETF issuers will be required to buy and sell the underlying assets. Although it remains uncertain where they will gain access to these assets, an increase in flows on centralized spot exchanges could be recorded, particularly because there are already a sizeable number of ETFs set to be approved in one go.

The report stressed the importance of market liquidity saying;

Liquidity is also important from the perspective of an arbitrageur. The ETF price will need to track the underlying, which is possible thanks to buying and selling whenever a premium or discount emerges. Illiquid markets make the work of arbitrageurs more complex.

How Bitcoin Spot ETFs Could Change State of The Market

Additionally, the U.S. available cryptocurrency exchanges could play a significant role in spot ETFs and currently account for an estimated 45% of the global BTC market depth.

ETF approvals also can impact trading costs if more informed investors enter Bitcoin markets. It bears mentioning that over the last year, costs of traders in the form of spreads have improved since last year due to low price volatility.

Additionally, Bitcoin’s market depth has remained down for most of the year with no change in liquidity. On the other hand, spreads have narrowed, but an ETF approval could change this.

Explaining that ETF approvals could also impact trading costs if more informed investors enter Bitcoin markets, the report conclusively read:

Over the past year, costs for traders in the form of spreads have mostly improved since last year, likely due to low price volatility. To summarize, bitcoin market depth has stayed flat for most of the year (no change in liquidity) while spreads have mostly narrowed (lower costs for traders), but an ETF approval could change this.