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Bitcoin is facing a number of headwinds including low liquidity which is contributing to volatility. U.S. regulators are also heavily scrutinizing the crypto industry.

Bitcoin traded at its lowest level since mid-March on Friday as volatility, driven by low liquidity, continued to hit cryptocurrency markets.

Bitcoin ended the day lower by 2.58% at 26,181.46 after briefly hitting a low of 25,833.34 the lowest level since March 17, according to Coin Metrics. The biggest crypto asset by market cap posted a weekly loss of 11.25%, making it its worst week since Nov. 11.

There are a number of issues facing crypto markets right now including low liquidity, a crackdown on the industry from regulators in the U.S. and macroeconomic worries.

Liquidity issues

Bitcoin is up around 59% this year but prices have remained volatile, with low liquidity exacerbating moves higher and lower.

Clara Medalie, director of research at Kaiko, said there has been a "notable drop in market depth" for bitcoin.

Market depth refers to a market's ability to absorb relatively large buy and sell orders. When market depth is low, then relatively small orders can cause the price of an asset to move up or down in a substantial way.

And the liquidity situation could be set to get worse after Bloomberg reported that Jane Street and Jump Crypto, two of the biggest crypto market makers, will take a step back from crypto trading in the U.S. as the country's regulators continue their crackdown on the nascent industry. 

"While it is yet unclear the catalyst for today's sharp drop, the volatility is to be expected given the current state of liquidity, especially after larger market maker Jane Street and Jump Crypto revealed they were winding down their crypto exposure," Medalie said.

Liquidity has been a big issue for crypto markets since the closure of Silvergate and Signature Bank — two key platforms that people used to buy into the crypto market.

Regulatory scrutiny, congestion issues

Scrutiny from U.S. regulators on the digital currency industry has ramped up since the collapse of crypto exchange FTX last year.

The U.S. Securities and Exchange Commission warned American crypto exchange Coinbase in March over potential securities law violations. Coinbase CEO Brian Armstrong said the company is preparing for a years-long court battle with the SEC.

Meanwhile, the Commodity Futures and Trading Commission alleged in March that crypto exchange Binance violated trading rules.

The crypto industry is in a battle with U.S. regulators, accusing the SEC and the U.S. government of not laying out clear rules.

Meanwhile, the bitcoin network itself has faced congestion in recent days with Binance last week forced to temporarily halt bitcoin withdrawals. Bitcoin transaction fees spiked this week and while they are coming down, they still remain at elevated levels. The original bitcoin network was not designed to handle high-volume transactions.

"Bitcoin's attempts to break through $30,000 have come undone amidst a triple whammy of congestion issues on the blockchain, liquidity constraints caused by the scaling back of top market-makers Jane Street and Jump Crypto, and ever-circling regulators," Antoni Trenchev, co-founder at Nexo, told CNBC via email on Friday.

— CNBC's Tanaya Macheel and Gina Francolla contributed to this report.

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