Bitcoin Liquidity Crisis: A Detailed Explanation of the Causes.
The Bitcoin liquidity crisis refers to a situation in the Bitcoin market where supply and demand are imbalanced, leading to a sharp decline in liquidity. The specifics are as follows:
Causes of the Crisis: Supply and Demand Imbalance: Since 2024, a significant influx of institutional investors and ETF capital has led to a year-on-year surge of 432% in Bitcoin spot demand. However, the total supply of Bitcoin is limited and output is stable, while some investors hold their Bitcoin for the long term, making the number of Bitcoin available for trading insufficient to meet demand.
Liquidity Fragmentation: Cryptocurrency research firm Kaiko points out that Bitcoin has a problem of liquidity being unevenly distributed across various exchanges. This results in significant price differences between exchanges. In exchanges with low liquidity, prices are more prone to large fluctuations, affecting overall market liquidity.
Impact of Market Sentiment: During significant price fluctuations, investors may either hesitate or rush to sell. For instance, after Bitcoin's price broke through the new high of $120,000 per unit in July 2025, it subsequently fell. On July 15-16, 120,000 overseas users experienced liquidations within a 24-hour period, amounting to approximately $465 million in total liquidations. A large number of liquidations triggered market panic, exacerbating the liquidity crisis.
Regulatory Policy Uncertainty: Different countries around the world have varying regulatory policies for Bitcoin. Changes in these policies can impact market confidence, leading to capital outflows and subsequently affecting Bitcoin liquidity.
Recent Performance: Decrease in Exchange Inventory: In 2025, Bitcoin is gradually becoming scarce, with exchange inventories continuously decreasing, and cold wallet holdings soaring. The Dormancy Index is approaching historical highs, marking a shift of Bitcoin from a tradable asset to a 'faith anchor,' thus reducing its tradability.
Main Impacts: Increased Price Volatility: The liquidity crisis makes Bitcoin prices susceptible to minor trades, widening the bid-ask spread, making it difficult for investors to execute trades at expected prices, and increasing investment risks.
Erosion of Market Confidence: The significant price fluctuations and trading difficulties caused by the liquidity crisis can lower investor confidence, leading to a substantial outflow of funds seeking safety, which impacts market stability.
Increased Transaction Costs: Due to the difficulty in finding trading counterparts, the difficulty of trade execution increases, consequently raising transaction costs, which affects market trading activity.
