Estimating USD-Digital Funding in the Ever-Changing World of Cryptocurrencies

By Irene Aldridge, Founder and CEO of AbleBlox

At AbleBlox, we continuously research and apply new quantitative analyses to the world of digital assets. We look for liquidity patterns in currencies, as well as volatility, and other market events. The most recent round of liquidity changes can be interesting to many market participants.

Specifically, as of November 2023, AbleBlox detected that BTC, ETH and DAI have been losing USD liquidity, with the holdings becoming more concentrated in their respective digital currencies since April 2023. At the same time, AbleBlox has observed considerable influxes of USD liquidity in AAVE, ADA, DOGE, SOL, TRX and XRP. Binance BNB coin has experienced a rather large liquidity infusion in 2023, but comprising assets other than USD. USDT liquidity remained remarkably stable, while WBTC liquidity expanded across both digital and USD spectra.

Why do we care about liquidity? According to Demsetz (1968), liquidity is a measure of immediacy of execution. In other words, liquidity suggests how easy it would be to buy or sell a specific digital asset should we desire to do so at any given time. Higher liquidity would ensure a quicker and more reliable trading environment, while lower liquidity may result in us being stuck with unwanted assets, if only in the most extreme cases.

Reduction in USD liquidity, however, can be a serious precursor to anomalous activity. A reduction in USD liquidity similar to the ones observed in ETH, BTC and DAI was also detected in FTX, Gemini and Bittrex, all before the latter ceased to operate and/or filed for bankruptcy. The importance of balanced USD-digital funding is indeed paramount to a healthy operation of the digital exchange: without USD liquidity, the valuation of digital tokens declines and potentially dissipates altogether.

The findings by AbleBlox regarding liquidity changes in digital assets highlight the importance of monitoring and maintaining a balanced USD-digital funding ratio. The reduction in USD liquidity observed in assets like BTC, ETH, and DAI can be a significant warning sign. At AbleBlox, we supply our clients with intraday liquidity updates and alerts. Please reach out to ialdridge@ableblox.com to learn more.

Irene Aldridge is a quantitative researcher and author of “High-Frequency Trading” (Wiley, 2009 and 2013) and a co-author of “Big Data Science in Finance” (with Marco Avellaneda, Wiley, 2021), as well as several other books and many scientific peer-reviewed articles.