Liquidity, not volatility: the structural obstacle of the crypto market

The cryptocurrency market has built a narrative around institutional demand over the past year, but there is a fundamental problem that no discourse can resolve: market liquidity remains insufficient to absorb the capital these institutions wish to deploy. This limitation is not a cyclical issue but a structural problem that prevents Wall Street from entering at scale without causing significant price distortions.

Jason Atkins, Chief Commercial Officer of Auros —a company specialized in providing liquidity for crypto markets— has identified a pattern that challenges convention: it is not volatility that keeps institutional investors out of the market, but precisely the lack of liquidity to manage that volatility when it arises.

Why liquidity has become the critical factor for institutional demand

“Convincing institutional capital to enter the market is not enough if there is no structural mechanism to do so safely,” Atkins argues. The fundamental question is whether markets have the necessary depth to absorb institutional appetite without destabilizing.

The issue is expressed simply but revealingly: “Do you have enough seats in the car?” The metaphor captures reality —interest exists, funds are available, but the channels to deploy them in an orderly manner are simply not built at the required scale. When institutional capital tries to operate in thin markets, positions become difficult to cover and even more complicated to liquidate without causing adverse price impacts.

The deleveraging cycle and its impact on market depth

Significant deleveraging events —such as the October 2025 crash— have accelerated liquidity contraction rapidly. During these events, leveraged traders withdraw from the system faster than new capital can return, leaving a vacuum that market makers have no incentive to fill when uncertainty prevails.

Liquidity providers do not generate demand; they respond to it. In a context of reduced trading activity, market makers are forced to reduce their risk exposure. This reduction in depth fuels heightened volatility, which in turn triggers stricter risk control mechanisms and a greater outflow of liquidity from the system. The result is a vicious cycle: illiquidity breeds volatility, volatility breeds caution, and caution reinforces illiquidity.

Institutions, from a structural perspective, are unable to act as market stabilizers as long as this thinness persists. Without robust institutional backing, during periods of stress, there is no natural counterbalance to absorb pressure.

Institutional capital vs. reality: the gap keeping Wall Street out

The critical point Atkins emphasizes is that volatility alone does not discourage large capital allocators. The real problem arises when volatility intersects with markets lacking liquidity. “In an illiquid market, trying to capitalize on volatility becomes extremely complicated,” he explained. Positions simply cannot be covered or closed cleanly.

This dynamic impacts institutions and retail traders in radically different ways. Large allocators operate under notably restrictive capital preservation mandates, with little room for liquidity risk tolerance. For a massive institution, the goal is not “maximize return” in absolute terms but “maximize return relative to capital preservation.” In that framework, a market where positions can become trapped is an unacceptable risk.

Consolidation or drought? The current moment in cryptocurrencies

Atkins dismisses the hypothesis that capital is simply rotating from cryptocurrencies into artificial intelligence. Both sectors are not at the same point in their cyclical maturation. Although AI has existed for years, its explosion in investor attention is relatively recent. Cryptocurrencies, on the other hand, are further along in their lifecycle: they have moved from novelty to consolidation.

The crypto industry has begun reaching a point where financial innovation has slowed down. Fundamental principles —such as AMMs and Uniswap— no longer generate novelty; they have become standard infrastructure. Instead of new market architecture, what is missing is the liquidity structure necessary for that innovation to be operationally viable at an institutional scale.

The liquidity deficit, in conclusion, is fundamentally structural, not cyclical or related to a preference for alternative assets. It persists because markets lack the capacity to absorb volume, cover risks in an orderly manner, and allow capital to withdraw without destructive friction. As long as this limitation persists, new capital will remain cautious. Interest may stay intact, but it will be liquidity availability, not market narratives, that determines when institutional capital can truly act.