Ethereum's Q3 Rally Came With a Hidden Catch Liquidity Drops
Ethereum's native token, ether (ETH), outperformed bitcoin (BTC) in the third quarter of 2023, with a 70% price surge compared to bitcoin's 42% gain. Despite this strong performance, ether's liquidity, or the ease of trading without significantly moving the price, saw a notable decline. According to CoinGecko, ether's median daily market depth between July 6 and September 30 was only 35% to 45% of bitcoin's, a significant drop from at least 60% in the same period last year.
Market depth measures the total dollar value of buy and sell orders near the current price. Ether had $13 million to $14 million in depth within 0.15% of its market price, indicating that clearing these orders would only move the price by 0.15%. While ether remains relatively liquid, with most exchanges maintaining over $1 million in depth on each side, the thinning liquidity challenges the common belief that rising prices attract more traders and deepen order books.
The liquidity decline isn't unique to ether. Solana (SOL), ether's main rival, also experienced a shrinking market. CoinGecko noted that SOL's depth within 2% of the market price fell from about $28 million on each side last year to around $20 million this year. This metric reflects the market's ability to absorb larger swings without significant price movements, highlighting the broader trend of thinning liquidity in major cryptocurrencies.