Why liquidity is draining from lower-tier cryptos, and how to adjust your portfolio

Disclaimer: The following content is for informational purposes only and does not constitute financial advice.

The cryptocurrency market continues to mature, and a structural shift is underway that few can afford to ignore: liquidity is increasingly concentrating in top-tier coins, particularly those in the top 50 by market capitalization. 

While speculation once drove investment into thousands of altcoins, today’s market rewards deeper fundamentals, higher trading activity, and proven resilience. This evolution is forcing both retail and institutional investors to rethink their portfolio allocations.

In this post, we explore the implications of this liquidity migration, the role liquidity plays in asset viability, and offer practical strategies for optimizing your portfolio based on this critical trend.

Understanding the liquidity shift

Liquidity is the lifeblood of any market. It defines how easily an asset can be bought or sold without causing sharp price movements. In crypto, it translates into tighter bid-ask spreads, deeper order books, and smoother exits and entries for trades of any size.

Market cap alone is no longer a reliable proxy for liquidity. Some tokens ranked in the top 100 by market cap exhibited extremely poor liquidity, while others outside that range were far more tradable.

Difference between market cap and liquidity rank

Source: https://research.kaiko.com/

Not all "big" coins are liquid, and not all liquid coins are big. However, a strong overlap remains in the top 50, where market cap and liquidity most often align, this is where most of the serious trading happens, and where liquidity tends to concentrate.

Market Cap Ranking vs Liquidity Ranking: Why the Difference Matters

A coin's market cap ranking reflects the total value of its circulating supply, calculated as price multiplied by supply. While this is useful for assessing relative size, it doesn't tell you anything about how easy it is to trade.

Liquidity ranking is based on several factors, including average bid-ask spread, market depth, and trading volume across exchanges. 

Liquidity rank components

Source: https://research.kaiko.com/

In this ranking, coins were scored from 0 to 100 based on real-world tradability.

Some tokens in the top 100 by market cap had bid-ask spreads exceeding 2% and order books with little depth, which makes them extremely risky for traders and investors. This undermines the assumption that "market cap equals quality" and highlights why liquidity analysis must be front and center in portfolio construction.

Here’s a simple example:

• Token A: Ranked #35 by market cap but with a liquidity score of 42/100. A large trade could easily move the price significantly.
• Token B: Ranked #60 by market cap, but with a liquidity score of 78/100. Despite a smaller total valuation, it is much easier to trade.

In volatile markets, that difference could spell the gap between a successful exit and catastrophic slippage.

Why liquidity is draining from small-caps

Several forces are driving the outflow of liquidity from coins outside the top 50:

1. Institutional consolidation: Institutions are deploying capital where execution is clean and slippage is minimal. Naturally, this drives volume and liquidity into blue-chip assets like BTC, ETH, and major Layer 1s and DeFi tokens.
2. Exchange delistings: As regulatory scrutiny intensifies and exchanges streamline offerings, low-volume coins are increasingly being delisted. This not only kills liquidity but also investor confidence.
3. Risk-off sentiment: In a market phase where capital efficiency and security are prioritized, speculative microcaps are often the first to be abandoned.
4. Regulatory pressure: Projects that fail to comply with regulatory expectations, or even appear to be skirting rules, tend to lose liquidity fast as exchanges and investors back away.

Implications for investors

This migration of liquidity away from lower-tier assets has real-world consequences:

• Greater volatility: Low-liquidity coins experience larger price swings from small orders.
• Wider spreads: Buying or selling may incur extra costs due to slippage.
• Exit risk: Attempting to sell a large position in a thinly traded coin can be problematic or even impossible without crashing the price.
• Manipulation susceptibility: Illiquid markets provide good ground for pump-and-dump schemes and wash trading.

Portfolio optimization in a liquidity-concentrated market

Given these realities, it’s time to make adjustments. Here’s how:

1. Prioritize liquidity in coin selection

When constructing or rebalancing a crypto portfolio, liquidity must now be treated as a primary factor, not just market cap. The Kaiko liquidity ranking is an excellent starting point to assess how tradable a given token actually is. Aim to allocate more capital to assets with deep order books and low bid-ask spreads.

2. Stay within the top 50, but don’t blindly trust the market cap

Focus your main holdings on tokens in the top 50, where both market cap and liquidity tend to align. But always check actual liquidity metrics. A token like Ethereum (ETH), stETH, or Chainlink (LINK) may not only have strong fundamentals but also reliable tradability across multiple exchanges.

3. Exit illiquid positions strategically

If you’re holding a bag of low-liquidity assets, now is the time to evaluate your exit strategy. Don’t try to dump all at once. Use limit orders, DCA exits, or look for liquidity windows (such as news events or exchange listings) to reduce exposure with minimal loss.

4. Use portfolio management tools that analyze liquidity

Modern portfolio dashboards like DeBank, Zerion, or even institutional-grade tools such as Messari or Nansen allow investors to assess liquidity risk. Lean into these tools to track how quickly you could exit positions in the event of a market downturn.

5. Adopt a risk-weighted allocation model

Rather than spreading capital equally, allocate based on liquidity-adjusted risk. That might mean holding fewer assets, but each with better exit potential and lower slippage risk. Don’t let the fear of missing out keep you overexposed to coins that could become untradable in a downturn.

Rebalance your portfolio easily with LetsExchange

As liquidity continues to concentrate in the top-tier assets, rebalancing your portfolio is more than just good housekeeping – it's a smart risk management move. Whether you're looking to exit low-volume coins or shift into more tradable assets, LetsExchange makes that process fast, secure, and hassle-free.

With support for over 5,000 cryptocurrencies across 300+ blockchains, LetsExchange allows you to swap virtually any asset pair you need, with access to floating and fixed rate options, cross-chain swaps, and high-volume transfer limits. 

Our platform aggregates rates from major liquidity providers to ensure you always get the best available price in the market. Rated 4.6 on Trustpilot, LetsExchange is trusted by users worldwide for its reliability and service quality.

So if you're holding outdated or illiquid tokens, now’s the perfect time to clean house. Reallocate into stronger assets with higher liquidity and better long-term potential – all in a few clicks.

Make your swaps now and give your crypto portfolio a fresh start.

Conclusion

As the crypto market matures, so must your portfolio strategy. The era of high hopes for illiquid microcaps is fading. In its place, we’re entering a market that rewards liquidity, transparency, and fundamental strength. Advanced tools make it easier than ever to identify tradable, viable assets and avoid the traps that come with chasing speculative coins based purely on market cap. At LetsExchange, we give you access to thousands of assets, flexible exchange options, and 24/7 support. Now is the time to rethink your portfolio and make every swap meaningful.

This blog post is for informational purposes only. It does not constitute investment advice, financial guidance, or a recommendation to buy or sell any assets.