A profound and persistent liquidity shortage is creating an invisible barrier that is systematically preventing trillions of dollars in institutional capital from entering the cryptocurrency market, according to a new industry report and analysis from market experts. Jason Atkins, Chief Client Officer at market-making firm Auros, argues that this lack of market depth—not headline-grabbing volatility—is the primary structural flaw paralyzing institutional adoption.
The crisis stems from a vicious cycle triggered by the forced liquidations of October 2023, which caused a significant exodus of proprietary trading firms and leveraged funds that once acted as key liquidity providers. This departure has forced remaining market makers to quote on thinner order books, drastically reducing the market's capacity to absorb large trades without causing significant price slippage. For a pension fund considering a $100 million Bitcoin position, this presents an insurmountable operational risk that violates strict internal mandates.
A separate report by Acuiti, titled "Navigating the Path to Crypto: A Guide for TradFi Firms," corroborates these challenges, highlighting how traditional financial institutions must completely rethink their approach. The fragmented nature of crypto markets, spread across dozens of exchanges with non-standardized APIs, forces firms to build custom integrations for each venue. Furthermore, crypto's 24/7, pre-funded trading environment pushes capital efficiency and counterparty risk to the forefront, with over half of surveyed institutions now using a crypto-native prime broker to manage these complexities.
Solutions are emerging but require industry-wide collaboration. These include the development of institutional-grade venues with dedicated liquidity pools, innovations in DeFi automated market maker (AMM) designs to reduce impermanent loss, and platforms enabling cross-margin netting for better capital efficiency. The Acuiti report also points to a gradual convergence with traditional finance, accelerated by new onshore, regulated derivatives exchanges that combine 24/7 trading with higher regulatory standards.
The consensus is clear: building robust infrastructure with deep, consistent liquidity is the essential prerequisite for sustainable institutional adoption and the long-term maturation of the entire cryptocurrency ecosystem.
