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Indian Crypto Exchanges See Sharp Drop in Liquidity

Crypto exchanges are hit a liquidity crunch. They are not able to complete orders.

India’s crypto exchanges are grappling with a liquidity crunch triggered by the new tax laws.

Liquidity providers are refraining from helping exchanges with a float or the difference between buying and selling price for concluding a transaction reported Economic Times (ET).

Usually, the liquidity providers provide such float on razor-thin margins.

TDS Puts Burden on Liquidity Providers

The new Tax Deduction at Source (TDS), at a rate of 1% on every crypto transaction. forces liquidity providers to provide a larger float, industry trackers said.

“Due to TDS there are mainly two issues that arise. Liquidity providers have taken a step back as it has become difficult for them since the spread in their order book has increased. Earlier it used to be 0.1% +/- now it will be 1%+0.1%,” said Siddharth Sogani, founder CREBACO, a cryptocurrency research firm.

So, if a seller wants to sell a cryptocurrency at Rs 101 and the buyer is willing to pay Rs 100, the liquidity provider would enter and help conclude the trade and charge a margin. With the newly introduced 1% TDS, the liquidity provider will have to provide not just for Re 1 but Rs 2.

“Liquidity providers and high-frequency traders are the most impacted by the 1% TDS provision and have raised concerns around the viability of the business. Currently, we are seeking clarity on the government’s view on whether or not losses can be offset within transactions in a single VDA. Having said that, the 1% provision is yet to get activated, and therefore the impact on liquidity is still minimal.”

Minal Thukral, Executive Vice President Growth and Strategy, CoinDCX

Industry trackers said some large trades to the tune of Rs 1-2 crore, especially on the sell side, are stuck for the past few days at top Indian exchanges. Majorly, it is because there are no buy-side orders. Even if there are buy orders, the absence of liquidity providers makes it difficult for exchanges to execute such trades.

Memecoins are the hardest hit by this crunch.

Liquidity providers are also important because of high volatility and a huge arbitrage opportunity across Indian cryptocurrency platforms. Prices across platforms vary—sometimes to the tune of 10% to 15%.

Unlike currency and stock trading, liquidity providers for cryptocurrency exchanges are not organised players but individuals, say insiders.

Change in Investor Profile

Another cause of crunch is the change in investor profile. Earlier young investors were putting in their money and driving up the prices. They seem to be liquidating their positions. They have been replaced by high net-worth individuals (HNIs) as the key investor segment on crypto exchanges.

Exchanges said several young investors who made money through high volumes of trading, including many from smaller cities and towns, have liquidated their positions, especially in the riskier assets.

On the other hand, HNIs are showing an increase in their interest in crypto.

This is an alarming situation for the industry as it is unregulated and decentralized. Control of the industry by a few individuals will make it inaccessible for retail investors, which is against the ethos of Web3.

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