Why is the price of Bitcoin exploding on some platforms and not on others?

As digital markets continue to mature, a complex dynamic is beginning to emerge that is disrupting traditional trading models: liquidity fragmentation. This phenomenon, far from being anecdotal, could well redefine the rules of the game on major crypto exchanges, accentuating price disparities and increasing volatility.

Liquidity fragmentation accentuates price disparities

Liquidity fragmentation in crypto markets has become an important factor to watch, especially during episodes of intense volatility. This dispersion of liquidity across different crypto exchanges leads to significant price divergences and thus disrupts traders’ strategies by creating sometimes costly arbitrage opportunities, according to Kaiko's latest report. The case of Binance.US, where trading volumes dropped drastically after the SEC’s legal actions in 2023, perfectly illustrates this phenomenon. On August 5, Bitcoin prices on this platform diverged significantly from other, more liquid markets, revealing the direct impact of fragmentation on price formation.

The effects of this fragmentation are not limited to major assets like Bitcoin. Indeed, other cryptos, particularly those with low liquidity, have shown even more pronounced price disparities. A more robust infrastructure and more rigorous liquidity management are therefore essential to minimize risks and stabilize markets, especially in times of high stress.

Current Challenges and Trends in Crypto Liquidity

The impact of liquidity fragmentation is not limited to price disparity across crypto exchanges, but also manifests itself through liquidity variations within trading pairs on a single exchange. Take Coinbase, for example, where BTC-EUR is significantly less liquid than BTC-USD, creating much more volatile market conditions during stress episodes. This was illustrated in March, when BTC-EUR experienced sharp price divergences from the broader market, exacerbated by plummeting market depth.

This trend is further amplified by the concentration of liquidity on business days, a phenomenon that has intensified with the advent of crypto spot ETFs in the United States. Unlike traditional financial markets, crypto markets operate around the clock, 24/7, making periods of weakness, such as weekends, particularly vulnerable to abrupt price movements. Sell-offs that begin on a Friday tend to intensify over the weekend, when liquidity is lower, amplifying the price impacts. This was particularly evident during the most recent sell-off, where Bitcoin moved 14% between the opening of US markets on Monday and the close on Friday, a recurring pattern during major corrections since 2020.

Moving forward, the ability of platforms to build resilience in the face of these challenges will largely determine the stability of crypto markets. Investors, meanwhile, should remain vigilant, aware that liquidity, or lack thereof, could be a deciding factor in future price movements.