Hidden Barriers in the Cryptocurrency Market: Why Lack of Liquidity Is More Decisive Than Volatility

What are the real issues hindering the growth of the cryptocurrency market? Many industry insiders have pointed to volatility (price fluctuations) as the culprit, but according to analyses from major market makers like Auros, the actual barrier lies in a lack of liquidity. Understanding this distinction is key to influencing institutional investors’ market entry and the maturation of the market.

The Reality of Liquidity Shortage Faced by Institutional Investors

Signals have repeatedly been sent from Wall Street that institutional capital wants to enter the crypto asset market. However, the bottleneck preventing this is not merely market uncertainty. Instead, it is a structural problem rooted in the market’s fundamental inability to absorb large institutional capital due to its limited size.

Borrowing the words of Jason Atkins of Auros, “Even if institutional investors want to put in funds, it’s meaningless if there’s no means to do so.” In other words, the market cannot welcome more investors without enough “seats” available.

The liquidity shortage in the crypto asset market is not due to waning investor interest but stems from deeper structural issues. Major deleveraging events (such as the crash in October 2025) led to a rapid purge of leverage trading and traders from the market. As a result, liquidity providers’ supply contracted sharply, and there were no longer enough buyers or sellers to stabilize the market.

Understanding the Difference Between Volatility and Liquidity Shortage

A crucial distinction must be made here. Volatility (sharp price swings) and liquidity shortages (a lack of trading counterparties) are often confused but are entirely different issues.

According to Atkins, volatility itself does not necessarily deter large investors. The problem arises when volatility occurs in a market with poor liquidity. In such markets, it becomes difficult to leverage price movements because there are no counterparties to hedge positions or to liquidate holdings, making sales at critical moments challenging.

This dynamic impacts institutional investors far more significantly than individual investors. While individual investors can move flexibly with relatively small assets, institutional investors operate under strict mandates focused on capital preservation. For large asset managers, the key concern is not “how to maximize yields,” but “how to maximize yields while preserving capital.” In markets with insufficient liquidity, fulfilling this fundamental principle becomes extremely difficult.

The Vicious Cycle Created by Deleveraging Events

To understand how liquidity diminishes, it’s necessary to follow the behavior patterns of market makers (liquidity providers). These providers facilitate trades based on market demand; if demand is absent, they are unlikely to actively stimulate the market.

When trading activity declines once, market makers naturally begin to raise risk thresholds (reduce positions). This further reduces liquidity, leading to higher volatility. Elevated volatility then prompts even stricter risk management and additional liquidity contraction. This creates a self-reinforcing negative cycle: liquidity → volatility → further liquidity reduction.

As Atkins points out, when the market is thin, there is no structural space for large investors to act as stabilizers. Without a natural safety net during stress, the market becomes increasingly fragile. The interplay of liquidity shortages, volatility, and caution keeps the market trapped in a self-reinforcing cycle, despite long-term interest.

Strict Risk Management Demands from Large Investors

Another reason why institutional investors are cautious about entering the crypto market is their low tolerance for liquidity risk. In capital management, unpredictable liquidity loss is one of the greatest risks.

According to Atkins of Auros, large investors operate under the premise of “capital preservation.” Therefore, in markets with uncertain liquidity, they hesitate to enter even if yields are high, because they might be unable to unwind their positions if the market becomes dysfunctional.

This strict operational mandate differs significantly from individual investors’ thinking. For institutional investors, “scale” is a critical issue. The larger their capital share in the overall market, the more they need to consider liquidity risks.

Market Cycle Stages and Caution Toward New Capital

It’s important to dispel a common misconception: claims that capital is flowing out of crypto into artificial intelligence (AI) are oversimplified. The reality is more complex.

AI and crypto are not at the same stage in the market cycle. While investor interest in AI has exploded relatively recently, AI itself has existed for years. Conversely, the crypto market is at a more advanced stage of its cycle, where what is needed now is not new innovation but the integration and maturation of existing primitives.

Atkins states, “The industry is beginning to reach an era of integration,” and notes that “financial innovation is no longer happening as it once did.” Core primitives like Uniswap and AMMs (Automated Market Makers) are no longer new; the focus is now on building new value layers on top of them.

In this environment, new capital remains cautious. The reason is straightforward: until the market can absorb scale, provide sufficient liquidity for risk hedging, and allow clean exits, additional capital will be held back.

Toward a Structural Solution to Liquidity Issues

Ultimately, the liquidity problem in crypto markets is not cyclical but structural. It is not just a matter of cycles but requires addressing at the level of market infrastructure and participant composition.

According to Atkins, the crypto market is currently at an “LLM moment.” This indicates a transitional phase where, instead of new risk assets siphoning capital from the entire market, an integrated layer is forming over existing primitives, signaling a phase of consolidation.

While Bitcoin’s current price around $87.88K (as of January 29, 2026) remains relatively resilient, market volatility still persists. However, what matters is not volatility but liquidity. The decision to act depends not on market psychology or new narratives but on whether a sufficient liquidity foundation can be established to absorb large capital flows.

The full entry of institutional investors and market stabilization will only occur with fundamental improvements in liquidity structure. Until then, the market will continue to cycle through self-reinforcing vulnerabilities driven by the gap between apparent interest and actual capital deployment.