The Cryptocurrency Market's Absorptive Capacity: Liquidity Issues as Barriers to Institutional Entry

While crypto markets have recently attracted attention due to increasing institutional demand, the lack of market infrastructure to meet this growing interest remains a serious issue. Limitations in the markets’ ability to absorb institutional capital indicate a structural liquidity problem. As emphasized by Auros’s Chief Commercial Officer Jason Atkins, the real obstacle in the crypto sector is not volatility, but the lack of sufficient market depth and liquidity.

Lack of Market Depth: A Factor Frustrating Institutional Investors

Institutional investors generally do not see volatility as the main problem. The real challenge is the limited ability to manage this volatility in thin markets. Jason Atkins explained, “Taking advantage of volatility becomes difficult in markets with insufficient liquidity because hedging positions and exiting cleanly become quite challenging.”

All major institutional players operate with strict risk management protocols that prioritize capital preservation. When managing billions of dollars, achieving “risk-adjusted returns” rather than maximizing returns becomes crucial. The narrowness of the markets makes it impossible to absorb such large sums.

Leverage Reduction Events and Liquidity Spiral

Liquidity issues in crypto markets have recently been caused by large position liquidations. The market crash in October 2025 rapidly removed many leveraged positions from the system, significantly reducing liquidity. This triggered a withdrawal of market makers, and as trading volume decreased, volatility increased.

Liquidity providers are actors who respond to demand, not create it. When trading volume drops, market makers withdraw from risk, leading to narrower bid-ask spreads. As a result, a cycle forms: liquidity shortage → increased volatility → tighter risk controls → further withdrawal of liquidity.

Institutions cannot play a balancing role unless markets are sufficiently broad, and there is no natural support during stressful periods. This is a structural problem in crypto markets, different from cyclical contractions. Even if interest continues, until markets have sufficient depth, risk management tools, and liquidity absorption capacity, new institutional capital will remain cautious.

Web3 Projects’ Absorption Strategies: Pudgy Penguins Example

New projects in the crypto ecosystem are beginning to find ways to overcome market liquidity issues. Pudgy Penguins stands out as one of the most prominent NFT projects of this period, transforming from a speculative “digital luxury product” into a versatile consumer IP platform.

Pudgy Penguins’ strategy is to first absorb users through main channels and then integrate them into Web3. Users gained through toys, retail partnerships, and viral media are later introduced into the crypto ecosystem via games, NFTs, and the PENGU token.

The Pudgy Penguins ecosystem combines physical and digital products (over $13 million in retail sales, with over 1 million units sold), offers games and experiences (Pudgy Party surpassed 500,000 downloads in the first two weeks), and establishes connections through the widely distributed PENGU token (airdropped to over 6 million wallets).

Current State of Bitcoin and the Crypto Market

Bitcoin serves as a barometer for the crypto market. Current data provides important clues about the market structure.

• BTC Price Status: Approximately 63% of invested Bitcoin wealth is above the cost basis of $88,000. The current price is $88.13K, with a 24-hour change of -2.16%.
• Market Depth Indicators: On-chain analysis indicates a high concentration of supply between $85,000 and $90,000. Support levels below $80,000 are relatively weak.

The PENGU token is currently trading at $0.01.

Structural Transformation: Transition from Innovation to Consolidation Phase

Jason Atkins stated that the crypto industry is beginning to reach a consolidation point. The pace of financial innovation has slowed compared to previous levels. Protocols like Uniswap and AMM models are no longer new but have become embedded solutions. This indicates that the sector is entering an “LLM moment.”

The slowdown in crypto market liquidity is less about capital shifting to other areas and more about the lack of new structures and innovations that sustain sustainable participation. According to Atkins, until markets can absorb size, hedge risks, and exit cleanly, new capital will remain cautious.

In conclusion, even during a period of continued interest, the limitations of liquidity and market infrastructure continue to be the main factors influencing the decisions of institutional and individual investors.