Solving the crypto liquidity puzzle

Crypto liquidity is the defining challenge for institutions scaling their digital asset strategies. Fragmented venues, inconsistent data, and rapid market shifts make execution difficult and slippage costly. Shane Richardson explains how KX gives you the real-time analytics to see across markets, respond in milliseconds, and make smarter decisions when liquidity is on the line.

When the U.S. Securities and Exchange Commission greenlit the first spot bitcoin exchange-traded funds in January 2024, it was a watershed moment for digital assets. Just one year later, after record in-flows, the combined spot bitcoin ETFs exceeded $125 billion in holdings.

Why crypto liquidity is the biggest challenge for institutional trading

As institutional adoption accelerates, firms operating in the fast-evolving digital assets ecosystem increasingly need to apply rigorous, data-driven strategies from traditional finance (TradFi) to solve key challenges, not least of which is crypto’s fragmented liquidity.

As the old saying goes, ‘assets are only as valuable as they are liquid’. In capital markets, liquidity tends to be concentrated in a few major venues, enabling most assets to be sold without significantly affecting their market price. In crypto, however, liquidity is split across numerous centralized and decentralized exchanges (CEXs and DEXs), as well as over-the-counter (OTC) trading desks.

Crypto liquidity across CEXs, DEXs, and OTC: What you need to know

• CEXs: Liquidity is typically concentrated and offers high volume, but centralized control can lead to risks like transparency issues, price manipulation, or platform outages.
• DEXs: Liquidity is fragmented across multiple pools, making slippage a key concern, especially when executing large orders and during periods of high volatility or low volume.
• OTC desks: Liquidity is less transparent and typically caters to large, off-book trades, making price discovery difficult and leaving firms with less accurate market depth data.

While digital assets offer an exciting and fast-moving market, this fragmented liquidity landscape can lead to missed alpha, inefficient execution, and increased exposure to manipulative trading practices if firms aren’t prepared.

With crypto exchanges operating 24/7, using different protocols, and presenting often inconsistent data, it can be hard to see the full picture of market liquidity. Additionally, liquidity can vary not just across exchanges, but also among trading pairs within the same exchange, making accurate price discovery even more challenging.

Slippage as a signal: What it tells you about crypto liquidity health

A good barometer for liquidity is slippage, the difference between the expected and actual execution price of a trade. In volatile moments, or on smaller and less liquid exchanges, slippage can be brutal in digital asset markets. For instance, it exceeded 5% on KuCoin during Bitcoin’s August 2024 sell-off.

Clearly, liquidity is a critical challenge that all firms trading digital assets need to tackle. Read on as we explore how you can leverage real-time data to piece together disparate liquidity pools, building a complete picture and enabling informed decision-making in this dynamic market.

Real-time data: The key to managing crypto liquidity fragmentation

To build an up-to-date view of market conditions, you first need access to real-time data. By continuously monitoring and consolidating trade flows and order books across diverse exchanges, firms can rapidly compare price, volume, and liquidity conditions throughout the market.

However, bringing all this information together is easier said than done when you’re dealing with streaming data at the petabyte level. To build a complete market view, firms must have a unified and scalable analytics platform that can ingest huge volumes of varied and inconsistent data from myriad exchanges, structure and normalize it, then rapidly save and replay it with low latency and high throughput.

Moreover, the challenge isn’t just vast data volumes, it’s also data velocity. Since liquidity shifts rapidly in digital asset markets, firms must extract insights in real time, often within milliseconds. You need the ability to recognize instantly when order books are thinning or liquidity is being drained.

Solving fragmented crypto liquidity with scalable analytics platforms

This demands an analytics platform capable of ultra-low-latency processing. Look for platforms that leverage high-performance capabilities like parallel processing, in-memory computing, and micro-batching techniques to extract high-speed insights from streaming data, enabling rapid decision-making and execution.

Once firms have an up-to-date, consolidated view of market conditions, the next step is putting that data to work. With the ability to spot liquidity gaps or sudden changes in market depth, it’s possible to select the most favorable trading venue, optimize execution, minimize slippage, and limit exposure to market manipulation.

Here are some key capabilities made possible by high-performance streaming analytics:

Algorithmic market-making

This allows firms to react instantly to changes in price, volume, or order book depth. Liquidity-aware execution algorithms dynamically adjust bid-ask spreads and order placement based on venue-level order book depth. For example, when liquidity thins on one venue, a market-making engine might pull passive orders and shift quoting to a more liquid one to minimize adverse selection.

Liquidity aggregation

By seamlessly routing orders across multiple CEXs and DEXs based on the best available pricing and depth, liquidity aggregation minimizes slippage and enhances execution. For example, a firm using a VWAP strategy to execute a large Ethereum trade across exchanges risks sending part of their order to a low-liquidity venue, leading to worse prices. With real-time liquidity data, the firm can dynamically adjust routing, ensuring optimal execution and reducing risk.

Smart order routing

Advanced analytics enables intelligent order routing by continuously assessing real-time market conditions across venues — including price, depth, liquidity, and trading fees. If the available liquidity is insufficient to fill an order without significantly impacting prices, trades can be dynamically rerouted to more liquid venues or split across exchanges. Increasingly, firms are also deploying AI-driven strategies that can adapt on the fly, using machine learning models to detect liquidity shifts and forecast short-term price movements, optimizing execution in real time.

Mitigating market manipulation

A consolidated view of market liquidity also helps to protect firms against common price manipulation tactics, such as spoofing or front-running.

Consider a sobering example from March 2025: a trader attempted a $220,000 stablecoin swap from USDC to USDT on the Uniswap DEX — and ended up receiving only $5,000. A bot front-ran the transaction by draining and then replenishing liquidity in the USDC-USDT pool, resulting in devastating 98% slippage.

With an up-to-date picture of market conditions, firms can detect unusual patterns — like large orders being rapidly placed and canceled — and immediately adjust their strategies, ensuring they only execute trades in venues with genuine liquidity.

Building your crypto liquidity advantage with high-performance analytics

By harnessing real-time streaming analytics, firms can piece together a complete view of today’s complex crypto markets. Ultimately, applying proven TradFi capabilities to digital assets enables you to do more than tackle the challenge of liquidity, it lets you turn volatility into opportunity and ensure every millisecond counts in the race for alpha.

KX delivers ultra-low latency analytics and vector-native time-series processing , enabling crypto firms to monitor fragmented liquidity, power AI-driven execution strategies, and detect market anomalies in milliseconds. Whether you’re building a VWAP engine, simulating market scenarios, or analyzing order book decay across venues, KX helps you execute faster and smarter.

Trusted by top-tier investment banks, HFT firms, and exchanges for over 30 years, we’re ready to support you with your high-performance analytical database for the AI era. Our institutional-grade capabilities enable real-time analytics tailored to digital assets, and we’re ready to partner with you for long-term success.

Read our ebook Outrun the competition: Winning the digital assets race and take our assessment checklist to benchmark your firm’s readiness for high-performance analytics at crypto scale.