With low trading volume and liquidity, could Bitcoin fall to $23,000?

Bitcoin has wiped out all gains since Grayscale won the lawsuit. According to Bitpush terminal data, Bitcoin once soared to more than $28,000 after the announcement of Grayscale's victory. It has now retreated to around $25,700, down 11.4% in the past 30 days. Some industry analysts said that under the shadow of low trading volume and liquidity, Bitcoin may retreat to $23,000.

Very low trading volume and liquidity

Bitcoin's trading volume and liquidity have been at very low levels recently. According to Bitfinex's latest report on Tuesday, Bitcoin spot trading volume on centralized cryptocurrency exchanges (CEX) in August reached the lowest monthly level since October 2020.

“Spot volumes by asset have reached historic lows, and spot volumes have been declining across the board for several months,” the report added. Bitfinex analysts said the metric suggests “declining confidence in Bitcoin and the broader crypto asset space.”

The Bitfinex report highlights that the current trading volume and liquidity in the crypto market are extremely low. This low liquidity environment makes the crypto market susceptible to large price fluctuations even if the trading volume is not large.

Derivatives trading volume is 20 times that of spot trading volume

The Bitfinex report also mentioned an increase in trading volume on derivatives exchanges in mid-August, corresponding to the liquidation of more than $1 billion worth of leveraged positions on August 17. Bitfinex said that derivatives have been a driving force in the current market environment.

It also noted that data showed spot volumes shrinking further than derivatives volumes. “Yesterday’s data showed that derivatives volumes on major exchanges were 20 times higher than spot volumes,” the Bitfinex report said, referring to Monday’s data.

Trading volume for digital asset investment products also decreased. Bitfinex analysts said: "Trading volume for these investment vehicles fell to a total of $1.3 billion this week, 16% below the annual average."

Bitcoin derivatives show falling long demand

Analyst MARCEL PECHMAN said in a tweet that Bitcoin monthly futures are usually traded at a slight premium to the spot market, indicating that sellers are asking for more funds to delay settlement. Therefore, BTC futures contracts in a healthy market should trade at an annualized premium of 5% to 10%, a situation called futures premium. Bitcoin's current 3.5% futures premium (basis) is at its lowest point since mid-June (before BlackRock applied for a spot ETF), an indicator that reflects the decline in demand from leveraged buyers using derivatives contracts.

Analysts also said traders should also analyze the options market to understand whether the recent correction has caused investors to become less optimistic. A 25% delta deviation is a clear sign when arbitrage platforms and market makers are charging too much for upside or downside protection.

In short, if traders expect Bitcoin prices to fall, the deviation indicator will rise above 7%, and when the market is hot, a negative deviation of 7% tends to occur. The 25% Delta deviation of options has recently entered bearish territory, with protective put (sell) options trading at a 9% premium on September 4 compared to similar call (buy) options.

Market pessimism continues

Pessimism is rising in the market. The brief optimism that followed news of Grayscale’s legal victory against the U.S. Securities and Exchange Commission ( SEC ) last Tuesday has faded. Since then, Bitcoin has given back all of its gains after hitting a recent high of $28,100.

On August 31, the SEC extended the decision deadline for seven ETF applications by 45 days, further dampening investor enthusiasm. There is a growing belief that the U.S. Bitcoin spot ETF may face further delays.

The lack of sustained liquidity and trading volume has caused the key investor sentiment indicator, the Fear and Greed Index, to fall into a downward trend over the past 30 days , shifting from neutral sentiment to fear sentiment. The market may take longer than previously expected to get a bullish catalyst.

Falling to $23,000?

Given the lack of trading activity, Blackfridge Exchange CEO Mike Crosbie said in a Bloomberg interview that the market structure does not inspire much confidence. Crosbie believes that "as long as the $28,000 level remains lost, Bitcoin could fall to around $23,800."

September has historically been a difficult time for BTC’s price, with the cryptocurrency posting negative monthly returns every year since 2016. Crypto asset manager QCP Capital predicts that the largest crypto asset could fall to $23,000 by early October.

However, Vetle Lunde, a senior analyst at K33 , said in his report that the current price level ($25,760 at press time) provides a buying opportunity for investors with a longer-term view. He said: "This is a buyer's market in all aspects, and it would be unwise not to actively accumulate Bitcoin at current levels."