Digital currencies are fairly synonymous with fluctuations from the investment point of view for various reasons, but a thinning market may imply stock exposure will only be more susceptible to quick, extreme price alterations. In this article, we are going to have a look at what a thin cryptocurrency market is.
What Is A Thin Cryptocurrency Market?
Let us start with Thin market meaning. A thin cryptocurrency market on any financial exchange is a time span that is identified by a low number of purchasers and sellers, whether it is for a whole sector, a single stock, or the complete market. A thin market, also called a narrow market, can lead to price fluctuations.
A thin market in the crypto space has high price fluctuations and low liquidity. The balance between demand and supply can tip suddenly, forming a substantial impact on values. Since few bids and questions are being quoted, potential purchasers and sellers may even find it hard to carry out a transaction.
Though the complete volume is low, individual transactions tend to be big. That implies price shifts are higher. Along with that, the spreads among the bid and ask values for an asset tend to be broader, as traders try to profit from the low number of market players.
A thin crypto market is the opposite of a liquid market, which is identified by a high number of sellers and buyers, good liquidity, and relatively low price fluctuations.
Liquidity, by definition, is a calculation of the ease and speed at which an asset can be changed into cash at a good approximation of its value. Cash in our bank is a liquid asset. Normally speaking, stock shares might be taken as liquid assets. They can be sold conveniently at any time and the cash will be accessible with only a short delay. They should have a price equal to or more than their real cost unless the seller chooses a loser.
However, a thin market by its basics damages liquidity. Individual investors of crypto may find it hard or impossible to get a fair value in a thin market. The most predictable thin market on Wall Street happens each year in the last half of August when most of the traders abandon their desks and go to the beach.
How Does The Thin Cryptocurrency Market Affect The Crypto Space?
Crypto markets have been a lot quieter lately after their massive decline, with many digital currencies leveling out once more, although at much lower values than their record highs from November of previous year. Another purpose for the more subdued feel is because the crypto trading volumes for most of the major digital currencies are lower presently compared to the time they have been in months.
Bitcoin was trading at similar value a year ago, nearly $47,000 on February 13, 2021, while trading volume throughout all exchanges was approximately $62 billion with a market capitalization of $840 billion. This equates to trading volume of nearly 8 percent of the market capitalization. Wednesday, February 9, 2022 witnessed bitcoin price trading at $44,000 with a market capitalization of $837 billion and the trading volume was $29 billion, only 3 percent of the value.
This is not restricted to BTC; a trend is being witnessed across most of the major digital currencies. Ethereum has seen greater drops, the trading volume compared to value was 20 percent in February, 2021, and is just 4 percent presently. Over the same span of time, daily volume has decreased for BNB, which is the native token of Binance, from 22 percent to 2 percent, cardano, from 25% to 5%, solana, from 9% to 6%, and avalanche, from 17% to 4%.
The data is not biased by the impact of DeFi, as decentralized exchanges were inserted in the volume calculations, and it portrays a greater sensitivity to larger value swings with less trading volume. As institutional investors prevail to enter the space, their effect could be felt on a much larger scale unless trading volumes increase once more.
The Bottom Line
Thin cryptocurrency market of course implies that it does not take as much to shift prices as it once did. For instance, look no further than a week ago, Saturday, Feb. 5, when BTC finally broke above $40,000 and remained there for the first time in more than a week. Volumes the last day were $16 billion, and on Saturday they increased to $25 billion. Again, these figures are low even by latest standards, but they always serve as a reminder that it does not take much to shift a market. That may be something to consider should we see large institutional entrants anytime soon.