When it comes to markets, liquidity is an incredibly important variable. There are a plethora of ways in which liquidity matters to any market - whether TradFi or Crypto.
The FED & Biden Administration has made a coordinated effort to attack crypto rails. It's becoming readily apparent that this is happening. Some Crypto Twitter power users are calling this "Chokepoint 2.0" (1.0 being a phenomenon that happened in the 2008 crisis during the Obama administration).
Without getting too political, I'm going to talk about the situation and what I think the long-tail impacts of this negative crypto sentiment are going to be.
Liquidity in Crypto has Been Worsening
The liquidity in crypto has not been doing well. Here's a chart from Conor who works at KaikoData. He put together a great Tweet Thread and compiled a bunch of charts talking about liquidity across the ecosystem.
The 2% market depth has dropped to 10 month lows. This is directly correlated to U.S. rails being impacted. Market makers are losing access to go from fiat to crypto and vice versa. This is negatively impacting the market making business in a huge way.
The following chart shows US exchanges getting hit harder than non US exchanges. Look closely and note the divergence in correlation lately:
Binance vs. Coinbase
Coinbase recently announced that they are putting more focus on global operations. They are diversifying their business and literally heading overseas to hedge against increasing U.S. regulation. They also just received a wells notice that the SEC is suing them.
Slippage for trading BTC to USD and vice versa on Coinbase has been severely impacted - increasing by 2.5x since just the start of this month.
Meanwhile, Binance's BTC-USDT pair has remained unchanged. It is a crypto-to-crypto rail afterall - while Coinbase's is a Crypto-Fiat rail.
Having rails to/from crypto and fiat is very important. This coordinated attack is going to have rippling effects in the crypto industry.
Will This Kill Crypto?
No this won't kill crypto. We're simply going to see more and more activity move overseas. We've seen this play out as other government's have tried to ban crypto - could be short-term bearish but won't be long-term.
Long-term, the only impact is that the U.S. is losing market share. They're losing innovation. They're losing potential taxable capital.
The more that they tighten the onramps and offramps from crypto to fiat, the more they shoot themselves in their own foot. This is a national issue - the government has become the incumbent company that can't see their own disruption from the tiny tech startup. The startup continues to grow despite all the efforts of the incumbent and eventually... dominance will flippen.
Look at this chart. Wouldn't you want the USD to become a major player in crypto? Wouldn't it be bullish for USD to back all crypto pairs?
I mean, imagine if crypto was embraced and the USD also became the default reserve pairing against all other crypto assets. That would be mega bullish for the USD - especially since we all know that this new technology is going to take the world by storm and disrupt nearly every industry on the planet.
If I were at the helm of the USD, I would be fighting like hell to get all crypto's paired to USD and build massive liquidity.
BUT that's what big corporations and big governments do, right? They reject technology that could disrupt them... That's how they get disrupted.
All those businesses that went out of business because they denied transitioning to an internet-focused business model? Yeah, they're gone for a reason.
Conclusion
Am I worried about crypto's demise?
Not at all. I think even a full-scale ban on crypto in the U.S. wouldn't have that massive of an impact, long-term. All that's going to happen is that the U.S. is going to lose its share of innovation, capital and potentially even reserve currency status.
Innovation always wins in the end.
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