A decline in liquidity alongside a sharp price increase (as happened when Ethereum rose by 70% in the third quarter) is a classic market paradox, usually caused by the following main factors:
• Accumulation and transfers to cold wallets
When investors trust that the rally will continue, they withdraw coins from exchanges and deposit them in staking, DeFi protocols, or hardware wallets. This reduces the amount of ETH available for sale in exchange order books.
• Declining order book depth and market maker withdrawals
Due to strong price movements, market makers may reduce the size of their limit orders to lower their risk. When there are fewer buy and sell orders in the order book, liquidity declines and slippage increases.
• Price rises due to a shortage of spot supply, not derivatives trading
If the rally is driven by strong, concentrated demand (market buys), aggressive buyers quickly “push” the available supply off the order book. The price jumps higher, but overall market depth cannot recover quickly enough.
• Locking in staking and Layer 2
Some ETH liquidity moves from exchange trading to L2 networks (such as Arbitrum, Optimism, Base, and others), or is locked in the Beacon Chain validation mechanism.
Please follow up
$ETH
#ETHUp70%InQ3ButLiquidityFalls
• Accumulation and transfers to cold wallets
When investors trust that the rally will continue, they withdraw coins from exchanges and deposit them in staking, DeFi protocols, or hardware wallets. This reduces the amount of ETH available for sale in exchange order books.
• Declining order book depth and market maker withdrawals
Due to strong price movements, market makers may reduce the size of their limit orders to lower their risk. When there are fewer buy and sell orders in the order book, liquidity declines and slippage increases.
• Price rises due to a shortage of spot supply, not derivatives trading
If the rally is driven by strong, concentrated demand (market buys), aggressive buyers quickly “push” the available supply off the order book. The price jumps higher, but overall market depth cannot recover quickly enough.
• Locking in staking and Layer 2
Some ETH liquidity moves from exchange trading to L2 networks (such as Arbitrum, Optimism, Base, and others), or is locked in the Beacon Chain validation mechanism.
Please follow up
$ETH
#ETHUp70%InQ3ButLiquidityFalls
