Liquidity Shortage Is Blocking Institutional Crypto Adoption
Jason Atkins, Chief Client Officer at market-maker Auros, warns that a persistent liquidity shortage — not volatility — is the primary barrier to institutional adoption of crypto. Thin order books within a tight price band (≈1%) mean large trades cause severe slippage, preventing pension funds and asset managers from executing multi-million-dollar positions without violating risk mandates. The shortage intensified after mass forced liquidations in October 2023 drove many proprietary trading firms and leveraged liquidity providers from the market, leaving thinner, fragmented books and higher execution costs. Atkins says institutional entry requires predictable execution costs, deep order books, robust hedging/derivatives depth, and proven custody/settlement. Proposed fixes include regulated institutional venues with dedicated liquidity pools, DeFi AMM innovations to limit impermanent loss, cross-margin/netting for capital efficiency, and better liquidity transparency. The piece argues that attracting and protecting professional liquidity providers is the essential infrastructure task to enable large-scale capital flows and long-term market stability.
Bearish
A structural liquidity shortage constrains the market’s ability to absorb large orders, raising execution costs and slippage for institutional-sized trades. That deterrent reduces the prospect of substantial new capital inflows from pension funds and asset managers — capital that could otherwise provide stabilizing depth. Historically, after major forced-liquidation events (e.g., 2023 liquidations), markets saw a withdrawal of liquidity providers, higher spreads, and increased volatility until market-making capacity was restored; price discovery became less efficient and downside pressure increased. Short-term, reduced liquidity can trigger sharper price moves on large flows and worsen volatility, complicating active trading and risk management. Mid- to long-term, unless market-making capacity and venue infrastructure improve (regulated institutional pools, deeper derivatives markets, cross-margining, improved custody/settlement), institutional allocation will remain limited, keeping the market more fragile and prone to dislocations. For traders, this implies wider spreads, larger slippage risk on big orders, and higher sensitivity to large trades — conditions that favor nimble, liquidity-providing strategies and caution on large directional positions.