Lack of liquidity in the crypto market: the biggest obstacle to institutional entry

As the crypto market moves towards maturity, one problem has emerged that cannot be overlooked. It is not price volatility (volatility), but a lack of liquidity in the market. Jason Atkins, chief commercial officer at crypto market maker Auros, argues that the biggest structural challenge facing the industry is actually the lack of liquidity. Although interest from institutional investors is growing, the reality is that the mechanism for putting that capital into the market is not well developed.

The Market for Institutional Money and Its Liquidity Constraints

Even if institutional investors express their intention to enter crypto assets, it is meaningless if they do not have the means to do so. Atkins points out: “It’s one thing to convince them to come to the market, but then there’s the question of whether there are enough seats in the car that they get in.”

The lack of liquidity in the market is not due to a loss of investor interest, but rather triggered by large-scale deleveraging events, particularly events like the crash on October 10, 2025. In such turbulence, traders and leverage are quickly removed from the market, but liquidity providers cannot keep up with the speed. As a result, when trading activity decreases, market makers naturally tighten their risk management and increase liquidity. This decrease in liquidity leads to even higher volatility, which in turn encourages further liquidity to increase, creating a vicious cycle.

Structure of Liquid Risk More Severe Than Volatility

It is generally believed that high volatility keeps large investors away. However, Atkins sees it differently. The problem is not volatility itself, but volatility in a market with limited liquidity.

“It is extremely difficult to take advantage of volatility in a low liquid market,” Atkins said. This is because it is difficult to hedge positions and it is more complicated to complete the settlement. This constraint is far more significant for institutional investors than for individual investors.

Large investors operate under strict capital preservation directives and have little tolerance for liquid risk. The important thing in the decision-making of institutional investors with enormous assets is not “how to maximize yields”, but “how to maximize yields on the premise of preserving capital”. As long as this principle exists, insufficiently liquid markets cannot be expected to enter them.

New Capital Remains Cautious – Deep-Rooted Structural Challenges

Looking at the market as a whole, a self-reinforcing cycle is formed by the interplay of lack of liquidity, high volatility, and institutional caution. While the market is thin, there is structurally no room for institutional investors to act as market stabilizers. Even when stress occurs, there is no natural safety net.

According to Atkins’ analysis, this fluid problem is not cyclical, but fundamentally structural. New risk assets are not absorbing other capital, but rather the structure is that new capital remains cautious until the market can absorb scale, hedge risk, and exit cleanly.

Trial and error of new projects during the industry integration phase

Interestingly, Atkins points out that the challenges currently facing crypto assets are not due to capital shifts to other emerging assets. While it is true that investor interest in artificial intelligence (AI) is growing rapidly, the two are not at the same stage of the cycle. While AI has been around for several years, the surge in investor attention is relatively recent, and this is not inherently hindering capital inflows into crypto assets.

In contrast, industry insiders recognize that crypto assets are further ahead in the cycle and are already entering a phase of consolidation. “We’re getting to a point where we’re dealing with integration rather than novelty,” Atkins said, adding that “financial innovation isn’t as active as it used to be.” Many co-authoritatives in crypto assets, such as Uniswap and AMMs (automated market makers), are no longer new, but have already become established infrastructure in the market.

From this perspective, the slowdown in liquidity is not due to capital withdrawing from crypto assets, but rather to a lack of new mechanisms to attract sustained engagement. The industry is described as having an “LLM moment” – that is, it is in a mature stage waiting for the next paradigm shift.

Interest may still exist, Atkins clarifies. “It is not the narrative that determines when we can act in the market, but fluidity.” For capital inflows with action, it is essential to improve market liquidity.