Opinion by: Arthur Azizov, Founder and Investor at B2 Ventures
Despite its decentralized nature and big promises, cryptocurrency is still a currency. Like all currencies, it cannot escape the realities of today’s market dynamics.
As the crypto market develops, it starts mirroring the life cycle of traditional financial tools. The illusion of liquidity is one of the most pressing and, surprisingly, less addressed issues that stem from the market’s evolution.
The global cryptocurrency market was valued at $2.49 trillion in 2024 and is expected to more than double to $5.73 trillion by 2033, growing at a compound annual growth rate of 9.7% over the next decade.
Beneath this growth, however, lies a fragility. Like the FX and bond markets, crypto is now challenging phantom liquidity: Order books that look robust during calm periods quickly thin out during the storm.
The illusion of liquidity
With over $7.5 trillion in daily trading volume, the foreign exchange market has historically been perceived as the most liquid. Yet, even this market now shows signs of fragility.
Some financial institutions and traders fear the market’s depth illusion, and regular slippages on even the most liquid FX pairs, like EUR/USD, are becoming more tangible. Not a single bank or market maker is ready to face the risk of holding volatile assets during a sell-off — the so-called warehouse risk post-2008.
In 2018, Morgan Stanley noted a profound shift in where liquidity risks reside. After the financial crisis, capital requirements pushed banks out of liquidity provision. Risks didn’t disappear. They just went to asset managers, ETFs and algorithmic systems. There was a boom of passive funds and exchange-traded vehicles back in the day.
In 2007, index-style funds held just 4% of the MSCI World free float. By 2018, that figure had tripled to 12%, with concentrations up to 25% in specific names. This situation shows a structural mismatch — liquid wrappers containing illiquid assets.
ETFs and passive funds promised easy entry and exit, but the assets they held, corporate bonds in particular, could not always meet expectations when markets turned volatile. During drastic price fluctuations, ETFs are often sold more intensively than underlying assets. Market makers demanded wider spreads or refused to enter, unwilling to hold assets through turmoil.
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