On March 12 the crypto market saw one of its most precipitous and rapid price drops in history. The day before Bitcoin (BTC) was hovering just below $8,000, but by the time the sun rose in the Eastern United States on March 12 Bitcoin (BTC) had already plunged to below $6,000. That apparently was only the appetizer for that day’s bearish cuisine, since another equally bad price plunge occurred late at night, bringing Bitcoin (BTC) as low as $3,850. New data confirms that this event was associated with liquidity drying up on order books across the crypto space.

Liquidity can be measured by the bid-ask spread, which is the difference in price between people trying to buy and people trying to sell. A smaller bid-ask spread indicates higher liquidity, whereas a bigger bid-ask spread indicates lower liquidity. This is because order books with higher volumes of money being traded in them typically have bids to buy quite close to the asking price, whereas order books with lower volumes have less bids and asks, and the bidding prices will be further from the asking prices.

The bid-ask spread is measured in hundredths of a percentage point, called basis points, and apparently this is usually a single digit number on crypto exchanges. However, during the March 12 crash the bid-ask spread jumped to hundreds of basis points on some major crypto exchanges, with one exchange even jumping to 1,000 basis points, equivalent to a 10% bid-ask spread.

This means two things. First off, people selling crypto were not willing to sell for so low, and demanded prices that were significantly above the bidding price. Also, the rapid nature of the crash wiped out liquidity from order books across the crypto space.

Indeed, a previous article on Crypto.IQ discussed how a cascading liquidation, i.e. liquidation chain reaction, on BitMEX fueled the crash, and until BitMEX paused for an hour, the order book was being completely eaten up.

Notably however, the bid-ask spread quickly dropped even on the exchanges where liquidity dried up the most, and perhaps 2-3 days later conditions were back to normal. Basically, although liquidity rapidly dried up in the crypto space during the March 12 crash, it quickly returned as well.