Crypto traders would often blame “low liquidity” after a bad fill, but only a few understand what liquidity really is, why it disappears, and how a bad fill actually happens.
Liquidity affects how easily you can buy and sell assets at fair prices. The depth of the crypto market liquidity varies across different exchanges, assets, and trading pairs. Binance is rated the most liquid exchange by trading volume. Bitcoin is considered the most liquid crypto asset, and the BTC/USDT pair is more liquid compared to BTC/USD.
A $100K-$1M market sell could move the price of a low-cap altcoin by 5% or more, but barely noticeable on BTC. That’s a function of liquidity.
But liquidity is not static or fixed. It comes and goes – sometimes faster than it comes – with respect to market sentiment or investor confidence. We often track this through the Fear and Greed Index. Liquidity gets worse during periods of fear and uncertainty, and better during a bull market.
After this article, you’ll understand why markets move the way they do, not just that they move.
What Is Liquidity in Crypto Markets?
In the crypto market, liquidity refers to the ease with which you can enter or leave a position of a certain size without causing a big change in price.
Liquidity is not just the presence of trading volume. In fact, the best way to measure the liquidity profile of any crypto asset is to assess the spread, market depth, and slippage alongside trading volume.
Most of the time, the crypto market liquidity closely tracks investor sentiment, as mentioned before.
Many crypto assets are most liquid during bull runs when everyone is greedy and buying, but that vanishes at the slightest hint of fear. That’s why prices tend to react sharply to breaking political or regulatory events, macro factors, and even a major hack.
This leads us to another point: visible vs real liquidity. There is a difference between the visible liquidity in order books and real liquidity.
Difference between visible and real liquidity
Visible liquidity is the volume and Bid/Ask walls you see on the order books of crypto exchanges. The problem with visible liquidity, however, is that it’s often used for posturing, and so it can be spoofed. It vanishes during moments of fear in the market.
When that happens, prices spiral downward until they hit the real liquidity, creating long wicks on candles. Real liquidity is the reliable depth that actually absorbs market flow even in periods of fear. It’s usually off-book and comes in the form of hidden orders, dark pools, icebergs.
Why spreads matter more than volume
Spread is a better metric to measure the liquidity profile of an asset than the raw trading volume.
Trading volume can be faked through wash trading, which adds zero liquidity to the market. But it’s rather expensive to fake spread. Spread is the difference between the Bid (buy) and Ask (sell) prices. Even if the volume is decent, a widening spread suggests that real liquidity is thinning or that the market is unstable.
If you buy an asset with a 5% spread, you are down 5% the second you click “Buy,” not minding if the asset has $1 billion in trading volume.
Order Books, Depth, and the Illusion of Liquidity
Order books are central to how crypto exchanges like Binance, Coinbase, etc., are able to execute trades. It is essentially how exchanges are able to match a buy order to a sell order automatically, and there are two sides to it – Bid and Ask.
Bid vs Ask
Bid refers to the limit orders seeking to buy at certain prices. In the order book, Bids are usually positioned on the left side (in green), with the highest Bid at the top.
Ask is the complete opposite. It refers to the limit orders from sellers to sell above certain prices. Ask is positioned on the right side (in red), with the lowest offer at the top.
The slight difference between the best Bid and best Ask is how you calculate the spread.
Depth at each price level
At every price level, there is expected to be some Bid-Ask order. Depth refers to the volume or quantity of these orders resting in those price levels. The larger the volume, the deeper the books get.
A deep order book is usually a good indication of liquidity. It shows the market is able to absorb large orders without causing large swings in price.
For instance, if there is a large 1,000 BTC buy order around $85,000, the market would be able to absorb any sell order short of that quantity at that level, without affecting the price. But when the book is thin, with only 5 BTC at that price level, a large sell order would eat through that, and dip further until it’s completely filled, causing high slippage.
Why thin books exaggerate volatility
Volatility is sometimes exaggerated by market depth and liquidity.
Earlier, we mentioned how $100k could cause the price of an altcoin to swing by 5% or more. What happens is that the price would trend lower in search of Bids or liquidity, until the selling is completed. And due to thin order books, it could be a long way down, which translates to long bearish candles on the chart.
That drop often triggers stop-losses, leading to a cascade of liquidations, which also means more selling. The reverse is true for pumps.
Spoofing and fake depth
Order books are visible to everyone, and because of that, some bad traders would often fake large orders, creating a false sense of deep liquidity, to trick other traders. That tactic is known as spoofing.
Spoofers often use a technique called layering to make the fake depth look more convincing to traders. Instead of placing one massive order at a single price, they place multiple large orders at different price levels.
But these orders are never filled or hit by real orders. They are usually pulled before the price gets to them. Spoofers create these fake depths usually to encourage more trading activities by real traders or to manipulate the price in their favour.
Where Liquidity Comes From in Crypto
Crypto market liquidity is actually an incentivized service, and it comes from different sources, one of which notably includes market makers.
Liquidity providers do not do it because of the fun of it or altruistic reasons, but because of expected returns in the form of spreads, fees, rebates, etc. This is why liquidity is cyclical, as it gets withdrawn from the market during periods of fear.
Market makers
Market makers are the most popular source of reliable crypto market liquidity on Binance, Bybit, Coinbase, and other centralized exchanges.
DWF Labs, Wintermute, Jump Trading, GSR, Cumberland (DRW), and Kairon Labs are some of the top market makers in the crypto market.
They stay on the market at all times, constantly posting buy and sell orders for crypto assets, with the aim of capturing the Bid-Ask spread. Market makers aim to be Delta-Neutral, and so they don’t speculate whether price goes up or down.
Arbitrage desks
Arbitrage desks are another important source of liquidity in the crypto market. However, they are mostly drawn to price discrepancies.
The fragmentation of crypto market liquidity is why an asset can trade at a different price across multiple exchanges. For instance, Bitcoin might be trading for $60,000 on Binance but $60,010 on Coinbase.
Arbitrage desks bring balance to these prices by buying on the cheaper exchange and selling on the more expensive one. While it appears like they are extracting profit, the desks are essentially providing liquidity by filling the gaps.
Retail limit orders
Retail limit orders refer to all the buy and sell limit orders placed by everyday traders.
Retail traders are the organic source of liquidity in the crypto market. Their positions are not always as large as that of the market maker, but they come in numbers and are able to absorb market flow without big slips.
A market maker might place a single order for 10 BTC. With retail liquidity, you could have 10,000 traders each placing $100 to $1,000 limit orders worth of BTC. The market maker can easily cancel the order at a go, but it’d be harder for all 10,000 retails to pull their order at once.
Internal exchange liquidity programs
Crypto exchanges also run programs that incentivize pro traders and makers in order to maintain healthy books across different trading pairs.
On Binance, liquidity providers are rewarded with trading fee discounts, rebates, and low-latency access, among other things. Coinbase, Bybit, and several other exchanges offer similar liquidity programs.
Market Makers Explained (And Why They Matter)
Market makers are not investors. They don’t provide liquidity in the market because they are bullish or bearish, but because the math works. Yes, they operate for profit. But without them, markets would be choppy, expensive, and prone to wild swings.
What professional market makers do
The role of the market makers is just to ‘make’ the market. They do this by continuously placing limit orders on both sides of the book at multiple price levels. The process is automated through sophisticated algorithms connected via high-speed APIs to exchanges.
So, when traders are buying, market makers sell and vice versa. To facilitate these trades, they have to keep an inventory of the assets, which poses a risk to their operation.
The activities of the market makers allow for better trade execution with minimal slippage and tight spreads. Sometimes, however, they deliberately widen Bid-Ask spreads during periods of extreme volatility to discourage aggressive flow, and tighten them in calm times to capture more volume.
Spread capture vs inventory risk
Market makers primarily make their profits from capturing the spread. To recap, spread is the difference between the highest Bid and the lowest Ask.
At the time of writing, the best Bid and Ask resting orders for BTC/USDT on Binance were around $89,856.48 and $89,856.49, respectively, which gives a very tight spread of $0.01 or roughly 0.00001%.
So, a market maker would ideally make $0.01 from round-tripping a 1 BTC trade on Binance, which doesn’t seem like much. However, when repeated thousands of times per day and with high volume, it yields decent profit.
But there are threats to this profit. One of the outstanding risks to the market makers’ crypto business is inventory risk. Market makers need to have the asset, e.g., BTC, in order to sell to buyers. And they also end up with unwanted positions when they buy from sellers. When the price moves against them, they face losses on that inventory.
Some of the ways they manage inventory risk are by skewing quotes to force the market to rebalance orders and through Delta-Neutrality hedging, where they open positions against their own trade to have zero exposure when prices move up or down.
Why incentives matter more than “belief”
The average trader or investor buys into an asset because of their directional bias or long-term belief. Market makers play for an entirely different reason, which is to make profits.
They make profits from rebates, spreads, and other financial incentives that crypto exchanges provide. Once that edge is gone or threatened, either due to extreme volatility, regulatory shocks, or low rebates, they could reduce exposure or exit entirely. And that implies flight of liquidity.
Slippage, Volatility, and Liquidity Gaps
Slippage, volatility, and liquidity gaps are all connected in a way. The three are direct outcomes of how orders interact with fragile books. When one spikes, it amplifies the others, creating a somewhat cause-and-effect loop. Let’s unpack it.
Market orders vs limit orders
Crypto trades usually fall into two categories of orders, which include market and limit orders.
Market orders are instructions to buy and sell an asset immediately at the best available price. So, if you want to trade BTC or ETH instantly at the current market price, then a market order is the type to use.
Limit orders let you set a particular price at which you are willing to buy or sell, rather than executing immediately at the current market price. With limit orders, your trades go into the order books, which adds to the market liquidity.
Neither is without some cons, however. When you set a limit order, there is no guarantee that the price will hit your target. On the other hand, market orders expose you to slippage in a thin order book.
Why slippage spikes during news events
In simple terms, slippage is the difference between the price you expect to pay and the price you actually pay when your trade is executed.
Assuming BTC currently trades for $90,000, and you want to sell 1 BTC at the current market price, i.e., using a market order. In a thin book, you could have a 0.5 BTC offer at $90,000, and another 0.5 BTC farther down at $88,000.
That leaves you with a realized price of $89,000, instead of $90,000. So, your trade slipped by $1,000 or roughly 1%.
Slippage can get worse during major news events, especially if deemed bearish.
First, traders begin to panic and sell en masse. Price gets volatile, and the order book becomes overwhelmed on the sell side. Market makers step back, and then the book becomes thin, where you have the Bid and Ask orders far apart, leading to high slippage.
Liquidity vacuum scenarios
Liquidity vacuum describes a scenario where a price enters a zone with little or no resting liquidity, forcing it to skyrocket or plummet impulsively.
It’s quite common during crypto market bear runs, where you could see prices hit a cluster of stop-losses. A stop-loss is more like a resting order that immediately executes as a market order when the price reaches it.
If BTC drops below a psychological level of $80,000, you could have a cluster of stop-losses worth hundreds of millions, if not a billion, hit the market. With the book thin, the sell orders eat through what’s left, and continue to free-fall until they get to a new cluster of resting buy orders.
That’s how you get flash crashes in some cases.
Centralized vs Decentralized Liquidity
So far, we have been discussing liquidity on centralized exchanges like Binance, Coinbase, Bybit, etc., which is mostly tied to order books. Decentralized exchanges or protocols like Uniswap facilitate trades using a different system known as Automated Market Maker (AMM).
CEX order books
Liquidity on centralized exchanges sits on the order books, which contain a real-time list of resting Bid and Ask orders. From the books, the exchanges automatically match a buy to a sell to facilitate a trade.
The depth of the liquidity on order books is mostly concentrated by market makers, and it is an active type, in that the providers have to constantly adjust and make quotes in the books.
| Pros | Cons |
| 1. Tight spread and deep book for large trades | 1. Order books can be manipulated |
| 2. Low slippage when makers are active | 2. Liquidity can vanish at any instance |
| 3. Smoother trade execution | |
| 4. Allows for more efficient price discovery |
DEX AMMs
Liquidity on Uniswap, PancakeSwap, PumpSwap, and other decentralized exchanges is provided through automated market makers (AMMs). The liquidity comes from user-deposited tokens.
DEXs have a provision for liquidity providers, where anyone can deposit tokens in pairs into a smart contract pool, which is then used to facilitate trades.
The system of liquidity for DEXs is passive, in that the providers don’t necessarily need to engage at all times. They will continually earn fees from trades, as long as the tokens stay in the liquidity pool. Also, AMMs work in such a way that liquidity spreads across the entire price range, unlike order books, where market makers decide where to fill.
| Pros | Cons |
| 1. Anyone can add/remove liquidity | 1. Providers can suffer impermanent loss |
| 2. Passive income for liquidity providers | 2. There is a high chance of slippage with large trades |
| 3. No custodian risk | 3. Trades can be front-run by MEV bots |
| 4. Liquidity is always available |
Why Liquidity Disappears During Crashes
Liquidity involves money, and no one likes losing money, even market makers and retail traders. During stress events, like market crashes or major news, most market participants rush to limit their exposure, causing books to thin out quickly.
Risk-off behavior by market makers
What we just explained is the risk-off behaviour. It’s very noticeable with market makers because they have a deeper stake in the market. They quote Bids and Asks continuously. During crashes, volatility spikes, which pushes the books one-sided, and so they end up accumulating unwanted positions.
On top of that, they withdraw quotes or widen spreads to protect capital, and that drains liquidity.
In October 2025, following U.S. President Donald Trump’s announcement of a 100% tariff on Chinese imports, market makers aggressively cut their exposure in the market. That incident led to the liquidation of over $19 billion in leveraged positions.
Correlated liquidations
Crypto exchanges allow traders to open 10x–125x+ leverage positions, which amplify gains and losses. During crashes, some positions hit margin calls, where the exchanges are forced to market sell to cover losses.
When the sales hit the already-thin books, they eat through the scant liquidity, pushing the price further down and causing more liquidations – flash crash. The cycle will continue to repeat until the price finds a cluster of real liquidity.
Funding rate feedback loops
Traders pay a certain amount to maintain an open position in the perpetual futures market. In a bull market, the funding rate becomes positive, meaning long traders have to pay short traders to keep their positions open. That signifies that long traders are dominating the market, putting off potential short-sellers.
The reserve is the case during crashes. The funding rate turns negative, which discourages new longs.
So, when the price falls, liquidations increase, and the funding rate becomes negative. As a result, potential dip-buyers hesitate to enter the market, and so the books get overwhelmed with shorts, leading to further price drops.
Why “there were buyers” doesn’t matter
Oftentimes, you could hear traders say, “but, there were buyers at those levels, why did the price fall through?” That’s one question that shows how fragile liquidity is, and it also ties back to our earlier discussion on visible and real liquidity.
Not all resting orders in the books are tradeable. What really counts are those orders that can be executed in the moment. During crashes, retail traders and market makers tend to withdraw their quotes. The result is that what previously seemed like a thick wall suddenly becomes thin, which can fail to stop price slides.
Liquidity ≠ Volume (The Most Common Mistake)
Liquidity is not the same as raw trading volume. In the memecoin market, it is very common to see tokens with $1-100M in traded volume, but can hardly sell a $10k position, without suffering high slippage.
Some traders equate volume to liquidity, and so they continue to fall victim to spoofed volumes from wash trading and self-trading.
Wash trading
Wash trading is a deliberate act to inflate trading volume. It occurs when an entity or more coordinate to buy and sell an asset at the same price against themselves. Due to the transactions, the trading volume jumps, but in an actual sense, no real tokens changed hands.
Aggregators like CoinGecko, Dexscreener, etc., use metrics like volume change to rank Top Gainers and Trending projects. So, bad actors tend to wash trade in order to inflate volume, push rankings, and lure retail attention. Wash trading happens even on major crypto exchanges.
In June 2023, the Securities and Exchange Commission (SEC) alleged that Binance.US allowed wash trading by Sigma Chain, an undisclosed market-making trading firm owned by Binance founder Changpeng Zhao.
According to the SEC, Sigma Chain “engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform from at least September 2019 to June 2022. However, Binance refuted the claims, saying, “[…] the SEC’s wash trading allegations, while sensationalized with labels, are unsubstantiated with facts. Accordingly, the Complaint should be dismissed.”
In 2021, the Commodity Futures Trading Commission (CFTC) ordered Coinbase to pay $6.5 million in settlement for “reckless false, misleading, or inaccurate reporting as well as wash trading by a former employee on Coinbase’s GDAX platform.”
Self-trading is similar to wash trading. In a self-trade, a single person or entity acts as both the buyer and the seller in the same transaction. It’s more like moving money from your left pocket to your right pocket, which manipulates volume.
Why some high-volume pairs still have terrible execution
There are two culprits why a crypto pair may have terrible trade execution despite high volume.
The first is wash trading, which only means the reported volume was largely fake to begin with. When you try to make a trade with a large size, you only hit the thin resting depth, causing bad fill from high slippage.
The next is liquidity depth. A memecoin, for instance, might have up to $100K-$1M in trades every hour, but if those trades are all small like $10 to $50 each, the book actually lacks depth.
A sell order of $10K-$50K could easily exhaust a lot of available buyers in seconds. The order will continue to clear all resting Bids down the book until completely filled, causing high slippage.
That’s not sustainable. In most cases, the price of these tokens ends up crashing heavily after the last straw of liquidity.
How to Evaluate Liquidity Like a Pro
The better approach to assessing the liquidity profile of crypto assets is to analyze a combination of metrics, such as spread, volume, and depth, rather than a single metric.
Check spread size
Checking the spread is a good place to start. It tells you the state of market liquidity. A tight spread signals low immediate cost for trades with deeper underlying liquidity. When the spread is wide or fluctuates wildly, that warns of market instability. A 0.5% spread on major coins like BTC or ETH is a red flag.
Look at depth within ±1%
This is one way to assess the depth of liquidity for a given crypto trading pair. The 1% depth gauges the total value of all Bid and Ask limit orders in an exchange’s order book within 1% of the current mid-market price.
It basically tells you how much can be bought or sold before the price moves by 1% in either direction.
At a price of $90,000, the +1% depth measures the total value of all sell orders sitting between $90,000 and $90,900, while th -1% depth measures the total value of all buy orders between $90,000 and $89,100.
If the ±1% depth combined is worth $200 million, that means you could sell up to $100 million BTC and only move the price by about 0.5%.
Compare execution across venues
Earlier in the article, we mentioned that liquidity depth varies across different crypto exchanges and trading pairs, because the crypto market is largely fragmented.
Ideally, you want to trade on an exchange and pairs with good liquidity. You can check for price gaps or compare the consistency of spread and trade execution across exchanges.
Watch behavior during volatility
Volatility also doubles as a test of liquidity. When the book is thick, liquidity holds under stress. So, observe how the price, spread, and depth react during crashes, weekends, or major news events.
What Liquidity Tells Us About Market Maturity
In the early days, the crypto market was notorious for wild swings, which reeked of thin books. However, it can be said that the market has meaningfully matured, especially with institutional players involved. Major assets now boast of institutional inflows and deeper books. Prices feel more modest than before, at the very least.
BTC vs altcoins
Bitcoin is the most liquid crypto asset across major exchanges, and it continues to dominate the crypto market.
Altcoins have always had thinner books compared to BTC. However, it became more profound with the launch of the U.S. exchange-traded fund (ETF) in January 2024.
In May 2024, market analytics platform Kaiko reported that the quantity of Bids and Asks on an order book (i.e., BTC market depth) had surged from approximately $400 million to roughly $500 million across all exchanges, since the launch of the ETFs.
BTC and ETH used to have similar 1% market depth profiles during the previous bull market, according to Kaiko. However, BTC has twice as much as ETH.
As of December 2025, BTC’s ±1% depth on Binance alone was $536 million, while ETH and SOL had only $204 million and $56 million, respectively.
Stablecoin pairs vs native pairs
Across several trading platforms, crypto-stablecoin pairs like BTC/USDT or ETH/USDT have larger trade volume, better spread and slippage, compared to native pairs like BTC/USD or ETH/USD.
The dominance boils down to utility. With crypto-fiat pairs, traders have to deal with banks, fees, know your customer, and other compliance measures. However, crypto-USDT or USDC pairs don’t have these traditional banking constraints, and are practically more efficient for traders to move around money.
Why liquidity concentration matters systemically
There are two sides to liquidity concentration. If everyone trades Bitcoin on Binance or Coinbase, the order book there becomes incredibly deep. The spread wears thin, and you can even buy up to $10 million of BTC without moving the price.
But that exposes the market to a single point of failure. If the exchange suffers a hack or a technical glitch that takes it offline for a while, that shuts off the liquidity for the moment.
This articles is written by : Nermeen Nabil Khear Abdelmalak
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