The U.S. Securities and Exchange Commission’s approval of spot Bitcoin exchange-traded funds (ETFs) could elevate market liquidity for BTC, according to crypto market data provider Kaiko.

In its Q4 report published Thursday morning, Kaiko said market liquidity for Bitcoin — the largest cryptocurrency by market capitalization — could “see a real recovery” in several ways. Liquidity refers to how easily an asset can be sold or bought in a market with minimal impact on the asset’s price. 

First, not only do Bitcoin ETFs grow the investor base, but they also enable “intraday arbitrage between the ETF and the underlying asset,” both of which increase liquidity, Kaiko reported. 

Second, market makers that use Bitcoin ETFs as “additional hedging instruments” could increase liquidity. If market makers have instruments that respond in variable ways to market movements, they can offset the risks associated with holding inventory in one specific asset. 

Market makers are financial firms or ultra-high-net-worth individuals tasked with providing liquidity to a particular market by providing bids and offers of assets. They are typically ready to buy from sellers and sell to buyers. 

“Last year saw several large crypto market makers rein in activity or exit the market entirely, and no new significant ones have come back in,” said former CoinDesk head of research Noelle Acheson on X. “The needs of an ETF are likely to change that, given the big names that have been included as Authorized Participants… Jane Street, JPMorgan, Virtu, Cantor Fitzgerald,” she added.

“There’s no sugar-coating the facts: both volumes and order-book depth have dropped across the board, for all assets, on all exchanges since the collapse of FTX. Even the latest market rally has failed to resuscitate BTC market depth or volume to pre-FTX levels,” wrote Kaiko. “But, with a possible spot ETF approval, there is hope that liquidity could see a real recovery (despite some risks of a negative impact).”

One example of that risk, however, is liquidity pressure from ETF outflows during stressful market conditions.