Serious Concerns Facing the Crypto Market: Structural Challenges Created by Illiquidity Deficits

As the crypto industry matures, new concerns are rapidly emerging. It is increasingly pointed out that it is not market volatility, but a fundamental lack of liquidity. Jason Atkins, chief commercial officer at crypto market maker Auros, emphasizes that the biggest concern facing the industry is the depletion of liquidity in the market.

Real Concerns That Keep Institutional Investors Away

Demand from institutional investors has been said to be strong, but there are concerns that cannot be overlooked. According to Atkins, “even if institutional funds want to enter, it doesn’t make sense if they don’t have the means to do so.”

The core concern is whether the market size can meet the demand of institutional investors. Even if a huge inflow of capital is expected from Wall Street, the current liquidity of the market threatens to destabilize prices, which makes investment decisions cautious. The halving of spot crypto trading volume from $1.7 trillion last year to $900 billion speaks to investor caution.

Liquidity, not volatility, is a fundamental concern

Price volatility has generally been thought to keep investors away, but Atkins’ analysis shows a different story. The essence of the concern is not the volatility itself, but the collision between the illiquid market and the volatility, he said.

“It’s hard to take advantage of volatility in a market with low liquidity,” he noted. This is because it is difficult to hedge positions and it is not easy to close. This dynamic is a pivotal concern for institutional investors rather than individual investors. Large investors operate under strict capital preservation directives and have almost zero tolerance for liquidity risk.

Self-Reinforcing Cycle Hindering Market Size Expansion

A massive deleveraging event last October exposed the root cause of concerns in the form of liquidity shortages. With traders and leverage rapidly being removed from the market, liquidity providers are forced to respond according to demand. When trading activity decreases, market shapers naturally move to reduce risk.

The resulting decrease in liquidity leads to higher volatility, which leads to stricter risk management and further liquidity increases. While the market is thin, there is no structural room for institutional investors to act as stabilizing factors. Thus, illiquidity, volatility, and caution interact, creating a self-reinforcing cycle that keeps the market vulnerable.

Why New Capital Remains Cautious

Atkins refutes the popular view that capital is simply flowing out of crypto assets into artificial intelligence. The surge in investor attention in the artificial intelligence market is relatively recent and does not fundamentally hinder capital inflows into crypto assets.

Rather, it is important that the crypto market is at different cycle stages. “The industry is starting to reach a stage of consolidation,” Atkins said, noting that financial innovation is not happening as much as before. He believes that AMM (automated market maker) models such as UNIswap are no longer new, and the “LLM moment” in the market is gone.

The slowdown in crypto liquidity is not a withdrawal of funds, but a concern due to the lack of new mechanisms to attract continued engagement. Until structural challenges are resolved, new capital is likely to remain cautious until the market can absorb scale, hedge risks, and exit cleanly.

While interest may still exist, it is not the pretty narrative that ultimately dictates the action, but the sobering reality of market liquidity. Addressing the concerns faced by the crypto asset market will only be possible through the development of regulatory frameworks and strengthening market infrastructure.