Liquidity Shortages Become an Obstacle to Institutional Adoption in the Crypto Ecosystem

The cryptocurrency industry has entered a new challenging phase. Although institutional interest continues to grow, there is a structural barrier that cannot be ignored: severe market liquidity shortages. According to Jason Atkins, chief commercial officer of Auros—one of the leading crypto market makers—illiquidity is not volatility that is the main issue in the industry today.

“You can’t just say institutional capital wants to come in if you don’t have channels for them to do so,” Atkins explained before the Consensus Hong Kong event. His analysis reveals complex dynamics that hinder large capital flows into the crypto ecosystem.

Why Liquidity Shortages Are a Structural Problem

Liquidity shortages in the crypto market are not the result of waning interest but stem from last year’s major deleveraging events that pushed traders and leverage providers out of the system faster than they could return. Liquidity providers respond to demand rather than create it—creating a vicious cycle.

When trading activity slows, market makers naturally reduce their risk by tightening spreads and market depth. This reduction in depth then triggers higher volatility, which in turn prompts tighter risk controls from financial institutions and further liquidity withdrawals. The result is a self-reinforcing cycle: illiquidity breeds volatility, volatility breeds caution, and caution leads to even worse illiquidity.

Institutions Unable to Act as Market Balancers

The expected role of large allocators—to act as market stabilizers during shocks—cannot be fulfilled under current thin market conditions. Institutions operate under strict capital preservation mandates, giving them very low risk tolerance for liquidity risks. They must not only maximize returns but also ensure those returns are achieved without taking unnecessary liquidity risks.

“When you have that much wealth, or if you’re a large institutional player,” Atkins said, “it’s not about ‘can you maximize returns.’ It’s about ‘can you maximize returns relative to capital preservation.’” In a thinning market, maintaining positions becomes difficult, and exiting positions even more so. That’s why volatility is not their main concern—the real issue is the combination of volatility and liquidity shortages.

Industry Consolidation Replaces Innovation

Atkins also highlights that the crypto industry is entering a phase of consolidation, not organic growth driven by innovation. Many core primitives of crypto—such as Uniswap and AMM models—are no longer new. Liquidity shortages are more caused by the lack of new financial structures that attract ongoing engagement rather than funds flowing into other sectors like AI.

“I do think the industry is starting to reach a point of consolidation,” Atkins said. Crypto is experiencing its “LLM moment”—consolidating existing gains rather than pushing new boundaries. Until the market can absorb large transaction sizes, manage operational risks, and facilitate clean exits, new institutional capital will remain cautious in deploying funds.

Pudgy Penguins: Real-World Evidence of a Multi-Vertical Strategy

One concrete example of the evolution of the crypto ecosystem is Pudgy Penguins, which has grown into one of the most powerful NFT-native brands of this cycle. Their strategy reflects a shift from speculative “digital luxury goods” to a truly multi-vertical consumer IP platform.

Pudgy Penguins first acquires users through mainstream channels—toys, retail partnerships, viral media—before bringing them into Web3 via gaming, NFTs, and the PENGU token. Their ecosystem now includes physical-digital hybrid products with retail sales exceeding $13 million and over 1 million units sold, games and experiences like Pudgy Party that surpassed 500,000 downloads in two weeks, and widely distributed tokens via airdrops to over 6 million wallets. Although the market currently values Pudgy at a premium relative to traditional IP peers, sustained success depends on execution in retail expansion, gaming adoption, and deeper token utility.

Bitcoin as a Risk Asset, Not a Dollar Hedge

Market dynamics show a shift in investor perception of Bitcoin. Unusually, Bitcoin has not experienced significant gains when the US dollar weakens—contrary to traditional expectations. JPMorgan strategists explain that dollar weakness is driven by short-term flows and market sentiment, not fundamental changes in economic growth or monetary policy expectations. They forecast the dollar will stabilize as the US economy strengthens in the coming quarters.

Because the market does not see the current dollar decline as a lasting macro shift, Bitcoin is traded more like a risk asset sensitive to liquidity shortages rather than a reliable dollar hedge. Conversely, gold and emerging market assets are benefiting most from diversification away from the dollar.

Persistent liquidity shortages will remain a key factor in when institutional capital can truly enter at scale and size. Interest may be there, but market execution is what counts.