Bitcoin Forum

I am curious if the recent downward trend in crypto currency values could lead to a liquidity crisis at one of the exchanges.

Are there any ways to detect or predict such a thing?

Cex / Binance / Krakken were already expecting such crisis. That is why they limited new user registrations. The liquidity crisis would hit newer exchanges and ICO's much harder than it would do to the old exchange houses. Thankfully everything is "virtual" at worse, Yobit /Binance will lock a yet unlaunched token's wallet and let it's value skyrocket.

Let us first understand what is liquidity. In the traditional sense of a bank, a liquidity crisis occurs when most of its funds are locked up in long term assets and a lot of depositors ask for their money. Asset classes like real estate and private equity may also be considered illiquid, due to time and effort taken to find buyers.

As far as crypto exchanges are concerned , they are just supposed to hold your coins. In case there is a shortage of buyers at an exchange, you always have the option of withdrawing your coins and selling them at another exchange. So if an exchange has problems, it is not going to be about liquidity.

The price goes down because more people are selling than are buying. This means that more coins are available for purchase. I suspect that the OP is postulating that because of the drop, then exchanges are less likely to want to increase their inventory, and thus the coins will be harder to sell through exchanges. However, there is always the ability to use your coins to purchase assets, and therefore avoid the extra costs involved in using the exchanges. In fact this can be a good chance to profit from arbitrage.

Since the bearish or downward trend of crypto currencies is general
without any exception in the block-chain no matter which exchange one chooses to
transact with.It means that the issue of people getting apprehensive to sell and
hold FIAT money is rising by the day.Hence, this trend may affect most if not all
exchanges.Hence, the indices of liquidity may be considered as general to all exchanges
as the bearish signal affects all.You may decide to watch the market volume indices to ascertain
the frequency of demand and supply signals.Hence, use it to make informed decision.

Small exchanges do not have access to quasi-liquidity tools so they are at a risk to a certain degree if they are subscribing to irresponsible practices such as having only fraction of deposits and manipulating rest of the money. On the other hand, likes of Bitf***x can print their own money out of thin air thus creating illusion of liquidity when needed.

Overall concern is that we don't have enough transparency on inside practices of exchanges, and it is reasonable to suspect a degree of inside trading, bot manipulation, internal arbitrage, etc. Additional concern is diverse regulatory framework depending on the jurisdiction.