Liquidity Shortage: The Real Barrier to Institutional Crypto Expansion

For months, the crypto industry has been promoting a narrative about rising institutional demand, but there is one fundamental obstacle that continues to stand in the way: a significant lack of market liquidity. According to Jason Atkins, chief commercial officer at Auros, a leading crypto market maker, illegitimacy — not volatility — is the biggest structural issue preventing Wall Street from entering the market with the size and scale they want.

This statement was delivered at a major industry event and highlights a core dilemma facing the crypto sector: institutional interest does exist, yet the market infrastructure is not yet ready to absorb large amounts of capital flows without disrupting price stability.

Why Liquidity Is More Important Than Volatility

“You can’t just say institutional capital wants to come in if you don’t have an outlet for them to do so,” Atkins said, explaining that the lack of market depth is a real limitation that is often overlooked. Volatility itself is not a major obstacle for large allocators—problems arise when volatility meets a very thin market.

In such a scenario, taking advantage of volatility becomes very difficult. Large positions are difficult to hedge, and even harder to exit without causing significant price slippage. For institutions operating under a strict mandate for capital preservation, liquidity risks are far more worrisome than short-term price movements.

Atkins emphasizes that the focus of large allocators is not maximizing returns, but maximizing returns relative to capital preservation. With such a large asset, the safety of capital is a top priority.

A Cycle of Shortages That Reinforce Market Fears

The current lack of liquidity stems from a series of major deleveraging events—such as the October 10 Crash shock—that have pushed traders and leveraged positions out of the system faster than liquidity providers can return. This creates a circle of impact that reinforces each other:

Market depth is reduced → volatility increases → risk controls are strengthened → liquidity providers withdraw → depth decreases again. Structural institutions are unable to act as a buffer of stability while the market remains thin, so there is no natural buffer when pressure arises.

The result is a market that remains fragile despite long-term interest remaining strong. Liquidity providers react to demand rather than create it, meaning thinner trading activity naturally allows market makers to reduce their exposure risk.

In Atkins’ view, this problem is structural, not cyclical or simply about capital flowing to other sectors. Until the market can absorb the size, manage risk well, and allow for a smooth exit, new capital will remain cautious even if the fundamental interest is still there.

Market Consolidation and Lack of New Innovation

Crypto is undergoing a consolidation phase rather than exponential growth, a transformation that Atkins calls the industry’s “LLM moment.” There aren’t many new financial innovations going on—core primitives like Uniswap and Automated Market Maker (AMM) aren’t today’s technologies anymore.

The liquidity slowdown is more due to the absence of attractive new structures and products that can lead to sustainable engagement, rather than simply spending funds on other sectors. With most of the core models mature, the market needs fundamental innovation to attract a wave of fresh capital.

Pudgy Penguins: Examples of Successful Consolidation Strategies

In the midst of these general market challenges, Pudgy Penguins emerged as one of the strongest native NFT brands in this cycle. Their strategy shows how the project can survive the consolidation phase by diversifying the revenue stream.

Their approach is to acquire users through mainstream channels first—physical toys, retail partnerships, and viral media—before onboarding them into Web3 through games, NFTs, and PENGU tokens. Their ecosystem now includes:

• Phygital Products: Retail sales of over $13 million with over 1 million units sold
• Games and Experiences: Pudgy Party surpasses 500,000 downloads in first two weeks
• Widely Distributed Token: PENGU has been airdropped to more than 6 million wallets

Currently, the PENGU token is trading at the $0.01 level, reflecting the current market valuation. Pudgy Penguins’ continued success depends on execution in retail expansion, game adoption, and deeper improvements in token utility. The market is giving valuations a premium over traditional IP peers, which shows confidence in their multi-vertical business model.

Bitcoin Lags While Traditional Assets Rally

While the “real asset” narrative is evolving, Bitcoin is lagging behind in this momentum. Gold has been a major beneficiary of demand for stores of value, with price spikes exceeding $5,500 per ounce creating a dramatically increased nominal valuation.

Sentiment indicators such as the Fear & Greed Index for gold show very high optimism towards the precious metal. But similar indicators for the crypto market remain stuck in the fear zone, signaling a separation of perceptions between the two.

Bitcoin is currently trading at the $84.51K level with a decline of 5.31% in the last 24 hours, indicating volatility that remains its hallmark. Investors looking for a store of value tend to choose physical gold and silver over digital tokens, even though both are considered real assets.

This phenomenon reveals that even though the crypto narrative of “real assets” continues to evolve, Bitcoin is still traded like a high-beta risky asset. This separation will continue until the crypto market can build more solid fundamentals and more stable liquidity to attract institutional allocations on a significant scale.