Analysts have warned that even without strong selling pressure, a drop in activity on Bitcoin exchanges could lead to further price volatility.
summary
- Flows on Bitcoin exchanges have decreased, reducing internal market liquidity and increasing sensitivity to sudden trades.
- Analysts say the thin order book and high leverage increase the risk of sharp and volatile price movements.
- Derivatives data shows speculative positions being reset rather than panic selling, and the market is fragile but not broken.
While Bitcoin prices appear to be calming on the surface, deeper market mechanics suggest increased vulnerability below the range.
CryptoQuant contributor XWIN Research Japan warned in a December 15 analysis that a sharp slowdown in Bitcoin (BTC) flows between exchanges is reducing internal market liquidity. This increases the risk of sudden and large price changes in the absence of strong selling pressure.
Exchange liquidity is quietly drying up
Since early December, Bitcoin has hovered between around $80,000 and $94,000, after falling from an October peak around $126,000. While that scope-limited behavior may seem constructive, on-chain data tells a more nuanced story.
XWIN pointed to Inter-Exchange Flow Pulse, a CryptoQuant indicator that tracks the flow of Bitcoin between exchanges. The indicator turns red, indicating that the flow of funds between trading venues is slowing down.
When funds flow freely between exchanges, arbitrageurs support deep order books and stable prices. However, a decrease in these flows reduces liquidity. As momentum builds, even relatively small trades can start to fluctuate in price, increasing slippage and potentially causing sharp fluctuations.
This is happening at a time when Bitcoin balances on exchanges are nearing historic lows. While this can be supportive in quiet markets, there is less immediate selling pressure and therefore less supply available to cushion sudden buying and selling.
As XWIN points out, the current concern is not the amount of money in circulation, but the fragile market structure. With thin buffers and leverage still in play, even small shocks can quickly turn into large price movements.
Derivatives data points to a reset, not a panic
Separate data from Arab Chain, another Cryptoquant contributor, supports the idea that the market is not collapsing, but rather cooling. The Binance Derivatives Index's combined open interest and funding Z-score is close to -0.28, slightly below its historical average.
This signal indicates that traders are gradually lowering their leverage and overall risk, perhaps in response to previous overshoots, rather than jumping into new speculative bets.
In the past, a sudden positive Z-score was often followed by a pullback, usually during an overheated run. The current negative numbers tell a different story, one in which risk is gradually taken off the table as high-risk positions are unwound over time.
Despite the subdued activity in the derivatives market, Bitcoin is generally hovering around the $90,000 level. It appears that a wave of forced liquidations is not causing the rally, but rather that traders are deleveraging.
While this has dampened the short-term rally somewhat, many analysts see this as a positive reset rather than a sign of deeper weakness. They warn that even if long-term supply dynamics and institutional adoption remain favorable, Bitcoin is not a stable trend and could continue to be subject to sudden moves in either direction until exchange liquidity improves.
