Bitcoin, the largest cryptocurrency by market capitalization at $2.06 trillion has $825 million in bids-side liquidity, according to data from livecoinwatch.
This suggest that Bitcoin has less than 4% of its market cap value as available liquidity to fill any potential asset sales at the time. Of course, this changes through time, but these numbers are also reasons why volatility is high across crypto assets.
There is significant liquidity at stable prices to handle large orders. Companies like Strategy holding over $60 billion in Bitcoin, cannot easily sell their holdings due to shallow liquidity.
This might change as traditional capital seeks DeFi yield!
TradFi wants access to DeFi yield. We've seen this when ETF issuers pushed for the SEC to allow staking for crypto ETFs assets.
There's also growing demand for stablecoin yield, although banking groups are against it, I think offerings across DeFi would likely be attractive to many traditional companies.
We've talked about traditional capital growing the crypto pie in terms of market capitalization, trading and transactions volume, revenue and users, but not much discussions on liquidity growth.
Of course, we've mentioned it a few times, but never really in details for what that might look like.
I'm not going to pretend like I know how most traditional businesses are going to approach DeFi yields. Native staking of assets like ETH and SOL is probably going to be a leading choice, but there lies price exposure.
With how volatile cryptocurrency markets are, I expect that a lot of TradFi crypto exposure or investments will be hedged.
This means that TradFi may employ strategies that allows it to be hold neutral exposure where price appreciation is neglected, in favor of yield from hedging spot and perpetual bets.
TradFi will increase spot-side bids and short perps with equivalent capital when funding rates yields favors it. Some may go as far as staking assets acquired through spot trades, while still holding shorts of the same asset on Perps, effectively earning yield from two sources.
It's a straightforward strategy to implement, although results of positive yields are not guaranteed, but it is expected that traditional investment companies, especially, will study the markets to find such opportunities.
This hunt for low-risk yield through delta-neutral strategies will lead to deeper liquidity for digital assets markets as capital flows aggressively across spots and perpetual contracts from TradFi companies.
If as much as $10 billion in traditional capital buys ETH in spot, stakes for native yield and another $10 billion hedges that investment through shorting ETH on Perps, the strategy could potentially earn over $1.4 billion if ETH is staked through staking partners paying over 3% and if the ETH shorts are made on OKX, which saw as much as +11.23% in funding rate for ETH in the last 1 year.
This brings effective yield to over 7%. A lot of money while managing risks properly. With solutions such as future yields trading, TradFi might be able to lock-in yield early on by selling to speculators that expect higher returns.
At the end of the day, spot orderbooks sees bid-side liquidity grow exponentially as capital flows through markets in search for low-risk yield.