Crypto markets might appear calmer after leverage was wiped out in October, but beneath the surface, liquidity remains absent.
Data from CoinDesk Research shows that order book depth on major centralized exchanges remains structurally lower, suggesting a more cautious market-making environment as the end of the year approaches.
This environment paves the way for tighter markets and sharper movements, increasing the likelihood that routine trade flows will produce outsized price swings.
Disappearance of liquidity
October’s cascade of liquidations wiped out billions of open interest in a matter of hours, but it also triggered something more subtle and far more persistent: an exodus of rest liquidity from centralized exchanges.
The damage is most apparent in the two assets that anchor the entire market. In early October, just before the wipe, bitcoin’s average cumulative depth at 1% from the average price hovered around $20 million across major venues, according to data from CoinDesk Research.
By Nov. 11, that same measure had fallen to $14 million, a drop of nearly a third, according to the data.
Market depth is a measure used by traders to assess the extent of liquidity in a market. Within a 1% range, this estimates the amount of capital that would be required to move the market by 1%, taking into account the cumulative value of all registered limit orders.
A thin book could deter traders looking to buy or sell higher volumes, as this would very often result in slippage, i.e. the price deviating towards an area where there is sufficient liquidity.
Depth at 0.5% to average price fell from nearly $15.5 million to just under $10 million, while depth at a wider 5% range fell from over $40 million to just under $30 million.
Ether shows an almost parallel pattern. On October 9, ETH’s depth at 1% of the average price was just above $8 million, but by early November it had fallen to just under $6 million.
There was also a significant drop in depth from 0.5% to 5%, creating a completely new market structure.
According to CoinDesk Research, this failure to recover BTC and ETH liquidity is not a quirk of timing but a structural change.
The analysts concluded that both assets suffered a significant decline in average depth that remained unresolved, “suggesting a deliberate reduction in market-making commitment and the emergence of a new, lower benchmark for stable liquidity on centralized exchanges.”
This not only impacts directional traders with a long or short bias, but also delta-neutral firms and volatility traders. Delta neutral firms rely on strategies such as harvesting an arbitrage spread on funding rates; However, a lack of liquidity means the size will have to be reduced, which could eat into profits.
Volatility trading can have mixed results, as lack of liquidity can ultimately lead to violent swings. This is ideal for those operating an options straddle, which involves purchasing a call and put option with the same expiration and strike price, as large price movements in either direction will result in profits.
Altcoins rebound from panic, but not to their previous strength
The contrast between the liquidity crisis and major altcoins BTC and ETH is stark.
A composite basket consisting of SOL, Yet this group saw a rapid technical recovery, with market makers quickly reinstating orders as volatility declined.
This rebound, however, did not bring liquidity back to its levels at the beginning of October. The depth in the 1% band remains about 1 million lower than it was before erasure, and the depth in the wider bands shows the same pattern of partial repair without full restoration.
CoinDesk Research believes that this divergence reflects two fundamentally different liquidity regimes: altcoins experienced a sharp collapse that forced market makers to aggressively re-enter once the market stabilized, while BTC and ETH underwent a slower, more targeted liquidity withdrawal as participants reassessed risk.
“The altcoin collapse was a temporary, panic-driven event requiring a rapid reestablishment of orders,” the analysts noted, adding that larger assets “experienced more deliberate and sustained risk aversion positioning.”
The trend, a violent drop, rapid rebound and lower plateau, suggests that altcoins have been shocked, while bitcoin and ether have been re-evaluated in terms of market maker engagement.
Macro is not a friend
If liquidity providers were already hesitant after the October upheavals, the macroeconomic climate gave them little reason to take risks again.
Data from CoinShares showed $360 million in net outflows from digital asset investment products in the week ending November 1, including nearly $1 billion withdrawn from Bitcoin ETFs – one of the largest weekly outflows of the year.
The United States accounted for more than $430 million of these outflows, reflecting the sensitivity of U.S. institutional flows to changes in Federal Reserve interest rate communications.
Market makers tend to reduce inventory, widen spreads, and limit posted size when macroeconomic uncertainty obscures directional conviction. The persistence of ETF leaks, the ambiguity around December rate policy and the general lack of strong fundamental catalysts have all contributed to a cautious stance.
What does all this mean?
The practical consequence of this reduced depth is that crypto markets are more fragile than price charts suggest.
Simply put: very important advances for traders.
Much less capital is now required to move spot markets in one direction or the other. Large trades from funds, arbitrage desks or ETF intermediaries can have a disproportionate impact, while even routine macroeconomic releases, such as a surprisingly strong CPI reading, a change in Fed commentary or new ETF outflows, risk producing exaggerated price reactions.
Lower liquidity also makes the system more vulnerable to liquidation cascades. If open interest rates recover quickly, as is often the case during periods of calm, the absence of a thick order book increases the likelihood that relatively minor shocks will trigger a new round of forced selling.
In a more benign scenario, limited liquidity can also amplify upward movements. If risk appetite returns abruptly, the same lack of resting liquidity could fuel outsized rallies.
A fragile market ahead
What is clear from the data is that the October selloff did more than liquidate overleveraged positions. It has reshaped the structure of the crypto market in ways that have yet to be implemented.
Bitcoin and Ethereum remain locked in a new, more restricted liquidity regime. Altcoins, although faster to recover, are still far from the levels that characterized early October.
As the year draws to a close, crypto now finds itself in a much more fragile position than it was in early October.
Whether this lack of liquidity will become a brief chapter or a defining feature of the next phase of the market remains to be seen, but for now, this hole remains and the market continues to find a way around it. – with great caution.
