Market Liquidity Survey: Amid Declining Liquidity, Retail Investors "Buy Lottery Tickets," While Major Investors "Purchase Insurance"

Author: Frank, PANews

Following the sharp decline in the cryptocurrency market on October 11th, the market appears to have entered a prolonged "cooling-off period." For most investors, rather than predicting price movements, understanding the extent to which market liquidity has recovered after the devastating impact of 10.11 is perhaps more important. Furthermore, how do the dominant funds in the market view the future direction?

PANews attempted to analyze the current market capital landscape using data from several sources, including order book depth, the options market, and stablecoins. The final conclusion was that the market does not appear to have experienced a genuine recovery, but rather is trapped in a structurally divided state characterized by continuously declining liquidity and institutional funds accelerating their defensive posture.

Micro-liquidity: Fragile balance and disappearing support levels

To understand the current liquidity situation, the order depth difference is one of the most direct indicators.

Taking the depth chart of the Binance BTC/USDT perpetual trading pair as an example, it is clear that since October, the depth of the buy order book has become increasingly lower, dropping from a level generally above $200 million to the $100-200 million range. The depth of buy orders has also significantly decreased, remaining below $200 million.

Regarding the difference, the gap between long and short order depths has become significantly more balanced recently, with the order difference only around 10 million over several days since November. These data indicate that the market is currently in a state of relative equilibrium between long and short positions, but with continuously declining liquidity.

Regarding open interest, the overall open interest of altcoins (excluding BTC and ETH) did not show an increase as prices reached a low point; instead, it also declined. In contrast, the market also experienced a deep correction in April, but after prices reached a low point, the overall open interest in that market rebounded significantly (and this rebound even occurred before the price reached its lowest point).

Meanwhile, trading volume in the altcoin futures market is also shrinking, with no significant increase in volume expected due to bottom-fishing. These figures suggest that the altcoin market has entered a state of neglect.

Options Market: Retail Investors Buy Lottery Tickets, Major Players Bearish.

Another interesting statistic is the crypto options/crypto contract open interest ratio. Data shows that BTC's options ratio has surged this year, even exceeding 100% at its peak, and currently hovers around 90%. Prior to this, BTC's options ratio had long remained around 60%. This means the current BTC market has completely shifted from being dominated by futures contracts to being dominated by options contracts. However, ETH's crypto options/crypto contract open interest ratio has fallen to an extremely low level this year, at approximately 30%.

This data confirms two points. First, the BTC market is now completely dominated by institutions and hedge funds, while ETH and other altcoins no longer appear to be trading options for them. Second, and crucially, options market data is becoming increasingly important in predicting the BTC market. This trend is also evident in the total open interest of BTC options; even as prices fall, open interest remains high.

Therefore, option expiration dates and major pain points have become important reference indicators for the current BTC market. Looking at current data, the most recent significant option expiration date is December 26th. At this time, the total number of call options reached 192,000, while the total number of put options was only 74,200. However, the total value of these put options is as high as $508 million, while the total value of call options is only $71.25 million. This inverted data indicates that call options are currently very cheap (around $370), while put options are very expensive (reaching $6,800).

Looking at the distribution of option strike prices, we can see that most call options are priced above $100,000, making it highly unlikely that they will exercise on December 26th. Therefore, while these call options are numerous, they are more of a speculative "lottery ticket" investment. Conversely, a large number of put options have strike prices concentrated at $85,000 and below. Furthermore, the market capitalization of put options reached $1.124 billion, while the market capitalization of call options was only $373 million (the premiums paid by investors to purchase the options). In summary, although there are more bullish investors, the majority of funds (approximately 75%) are actually betting on a decline or defending against a decline.

Furthermore, the biggest pain point right now is the $100,000 mark. This also means that the $100,000 price level may become the focus of competition between option sellers and buyers this month. For market makers (option sellers), they are likely the main bulls in the current market, and if the price can be pushed to around $100,000, they will be the biggest winners.

However, for institutions that invest heavily in put options, they are mostly using options to hedge against the risk of a decline in the spot market. Although they are essentially bearish as a defensive choice, the fact that they still put funds into put options when the cost of a bearish position is high indicates that they are significantly pessimistic about the future market trend.

Stablecoins: Compliance withdrawal, speculative capital on the sidelines.

Besides options data and order book data, stablecoin data is also an important indicator for judging the current market liquidity and direction, especially the flow of stablecoins on exchanges. However, this data also reveals significant divergences in the market.

According to CryptoQuant data, USDT's stablecoin reserves on exchanges have been on an upward trend this year and have maintained this momentum recently. On December 4th, USDT's reserves on exchanges reached a record high of $60.4 billion, and are currently still hovering around $60 billion. As the main pricing benchmark for non-compliant exchanges, the continued growth of USDT's exchange reserves indicates that a large amount of speculative capital is still betting or preparing to buy at the bottom. Combined with the current decline in holdings, it suggests that a large amount of speculative capital is in a wait-and-see state.

USDC, however, presents a completely different picture. Starting in late November, a large amount of USDC was withdrawn from exchanges, with exchange reserves plummeting from $15 billion to around $9 billion, a drop of 40%. As a leading compliant stablecoin, USDC's main users are primarily US institutions and compliant funds. They represent the institutional faction in the market. Currently, it's clear that this group is accelerating its exit.

Judging from these two shifts, it seems the current market is dominated by retail investors and speculative capital waiting to buy at the bottom, while compliant institutions are retreating. This aligns with the earlier discussion of changes in the BTC options market. Of course, another possibility is that, given the downside risks in the market, a large amount of capital is shifting its cryptocurrency holdings to stablecoins for hedging.

In reality, there are far more data and indicators used to judge the market than those mentioned above, but overall, they almost all lead to similar conclusions. That is, the market has not truly recovered after the sharp drop on October 11th. What we are seeing is a market with scarce liquidity and significant disagreements between major players and retail investors. Retail investors and speculative funds are holding onto their shares and observing the market, while compliant institutions or major funds are accelerating their withdrawal from the spot market and building short-selling defenses by paying high premiums in the options market.

The current market doesn't seem to be at a bottom, poised for a breakout; rather, it appears to be a defensive battle with institutional investors leaving and speculative capital vying for position. At this juncture, focusing on whether the $85,000 institutional support level is breached is far more pragmatic than expecting a breakout above $100,000.