Institutional investors trading Bitcoin face significant challenges as market liquidity declines. The BitGo team, which provides digital asset custody services, states that when there are not enough buyers and sellers in the market, even well-planned transactions can bring unexpected costs and price shifts. Especially institutions that want to make large transactions are concerned about the rapid rise in transaction costs in a low liquidity environment.
Liquidity Gaps and Transaction Costs
Liquidity in the Bitcoin market is defined as the ability to make any purchase or sale without causing a significant change in prices. However, the decrease in liquidity in the market can cause large-scale orders to move prices up or down rapidly. However, the depth of the order book, bid-ask spread, market maker activities and infrastructure reliability of exchanges directly affect liquidity.
While derivative markets and bitcoin pools wrapped with automated market makers running on blockchain can help offset some of the volatility in transactions, they are not seen as sufficient to provide the high depth of liquidity that institutions require.
BitGo team evaluates, “Even if the transactions pass all internal approvals and are made in accordance with the strategies, market conditions can sometimes increase costs.”
The organization also emphasizes that “During volatile periods, liquidity conditions can deteriorate rapidly and institutions need to take appropriate measures.”
Liquidity Management Strategies for Institutions
Institutions need strong infrastructures to access healthy and deep market liquidity. Indicators such as the depth of the order book, bid-ask spread, transaction volume and realized price shift can be used to monitor the current conditions of the market. Reliable exchanges and asset custody services make it possible to complete transactions quickly and safely.
Advanced custody solutions, asset segregation and operational controls make it easier to move large amounts without straining the market. BitGo officials advise institutions to closely monitor transaction costs, monitor price drift, and diversify their transactions across multiple platforms.
Institutions that are prepared for periods of lack of liquidity or increased volatility can have the chance to protect their portfolios from possible risks and prevent major market impacts.
As institutional capital continues to flow, liquidity management in bitcoin transactions becomes critical. Investors and custody service providers who can adapt to fragmented liquidity and sudden price movements in the market can act during high-volume transactions without causing excessive price impact in the market.
