US Bitcoin ETFs Set to Bridge the 'Alameda Gap' in Crypto Market Recovery

A significant drop in cryptocurrency price, a depletion of liquidity, and a loss of faith in the crypto sector were all consequences of FTX's collapse. It brought up grave concerns regarding the security and safety of user funds on cryptocurrency exchanges.

Post this collapse, the launch of Bitcoin ETFs on US stock exchanges is thought to be a remedy for the woes in the cryptocurrency sector. The market makers claim that Bitcoin exchange-traded funds offer an opportunity to restore the damage done to the cryptocurrency markets by the collapse of the FTX exchange and its sister hedge fund, Alameda Research.

‘Alameda Gap’ Keeps Bitcoin Volatile

The sudden fall of FTX and Alameda Research, two prominent players in the digital asset sphere at the end of 2022, left a notable void in Bitcoin trading, coined as the "Alameda gap." It resulted after a significant market downturn and an alleged fraud incident.

Key market participants, including Auros, Wintermute Trading Ltd., and GSR Ltd., anticipate this void to close gradually but acknowledge the process will take considerable time. They believe that increased investor interest and inflows from institutions, such as BlackRock Inc. and Fidelity Investments, who debuted their Bitcoin ETFs on January 11, will contribute to a more vibrant marketplace.

They anticipate to see a general improvement in liquidity across the board. However, short-term market fluctuations can have an impact on the recovery, which might take "weeks or months,".

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We expect to see a general uplift in liquidity across the board

Leading market makers Auros, Wintermute Trading Ltd. and GSR Ltd.

Overall Net Inflows

Market makers provide liquidity in the token marketplace by investing personally and on loans, earning profit from the differences between buy and sell orders. Since the debut of the 10 US spot Bitcoin ETFs on January 11, they have attracted collective net inflows of approximately $1.6 billion, according to Bloomberg data.

Trading volume within these ETFs tapered off to $1.2 billion on January 31 from $4.7 billion at launch, as hype around the products subsided, Bloomberg Intelligence reported.

Pre-launch anticipation and speculation regarding easier monetary policy propelled Bitcoin 88% higher in the past year to around $43,000. The largest digital asset reached an intraday high of about $49,000 when the ETFs began trading, marking a substantial gain but not holding its peak – roughly $20,000 short of its 2021 record.

According to CCData, digital-asset trading volumes reached approximately $1.4 trillion per month in January 2023, signifying a peak. Nevertheless, this figure was lower than the usual monthly volume experienced during the 2021 crypto market surge induced by the pandemic.

Wintermute's co-founder Evgeny Gaevoy expects trading volumes to surge back to pre-FTX levels by year-end for Bitcoin specifically. He also added that there will be a need to raise hundreds of millions in trading capital if we reach the level of chaos that exists in 2021.

I expect us to get to 2021 levels of volumes by the end of the year, for Bitcoin especially

Wintermute's co-founder Evgeny Gaevoy

Improvement in Market’s Ability to Handle Large Orders

The crypto market's capacity to handle substantial orders without drastically altering prices has shown improvement but remains below pre-FTX Research levels. A Kaiko researcher posted on X that the daily average number of bids and asks within 2% of Bitcoin's price increased slightly throughout January, although not yet reaching pre-FTX depth.

Market liquidity is shown by the number of bids and offers around the current price.

In 2022, Kaiko coined the phrase "Alameda gap" to describe the depressing impact of Alameda Research's failure and the ensuing regulatory reaction, as well as the company's crucial position as a crypto liquidity provider.

According to Chuan Jin Fong, head of sales for GSR Markets in Asia, Europe, and the Middle East & Africa, the market forecast has advanced significantly due to increased trust in upcoming ETF investments.