What Triggered Crypto’s Latest Selloff?
A record $20 billion in liquidations from the Oct. 10 crash may have created deep balance-sheet holes across major market-making firms, according to Tom Lee, chairman of BitMine and co-founder of Fundstrat. Speaking on CNBC, Lee said the liquidation shock “really crippled market makers,” reducing their ability to provide liquidity and forcing them to shrink activity. Lee argued that many market makers entered the crash with limited capital buffers. When the liquidation wave hit, several firms were caught off-guard and “went reflexively into survival mode.” The result, he said, was a weeks-long cycle of deleveraging. With reduced revenue from traders, fewer active hedges and less inventory financing, market makers have been “selling into weakness” to protect capital positions. Lee described the process as a feedback loop: falling prices trigger more selling, which leads to further balance-sheet tightening. He compared their function in crypto to a monetary authority. “Market makers are critical in crypto because they provide liquidity. They act almost as the central bank in crypto,” he told CNBC. Bitcoin traded above $121,000 before the crash and has since fallen to around $86,900. Most of the market followed the same trajectory.
Investor Takeaway
Forced deleveraging by market makers is one of the few structural pressures that can drag prices lower even when long-term fundamentals remain intact.
Why Market Maker Stress Still Matters
Lee believes the crypto market may face “another couple of weeks” of unwinding before liquidity conditions normalize. He pointed to a similar sequence in 2022 that took eight weeks to flush out. By comparison, the current downturn is only six weeks old. He suggested Bitcoin and Ethereum may again act as leading indicators for equities, as liquidity stress tends to ripple outward. The weakened market depth has coincided with a risk-off shift in global markets, sharp drops in AI-linked stocks and a jump in the VIX volatility index. Other market analysts echoed Lee’s concerns. Tony Sycamore of IG described the environment as “dislocated” and “fractured,” with price swings amplified by thin order books. Risk appetite deteriorated further on Friday, with bitcoin falling 2.1% to a seven-month low of $85,350. Ether slid more than 2% to $2,777, its weakest level in four months. Combined, bitcoin and ether are down more than 8% on the week. In total, about $1.2 trillion in crypto market value has evaporated over the past six weeks, according to CoinGecko.
Global Markets Add to the Pressure
Friday’s downturn aligned with a broad flight from risk assets. Bets on near-term Federal Reserve rate cuts faded, and high-growth tech stocks saw heavy selling. Crypto, often used as a leveraged gauge of risk appetite, reacted violently. Hong Kong-listed spot bitcoin ETFs — including funds from China AMC, Harvest and Bosera — fell roughly 7% each. The selloff extended across correlated equities as well, hurting companies that hold large bitcoin treasuries. Shares of Strategy (MSTR), once the flagship stock for bitcoin accumulation, fell 11% for the week and hit one-year lows. Metaplanet, Japan’s high-profile bitcoin adopter, has dropped nearly 80% from its June peak. In its latest research note, CryptoQuant called current bitcoin conditions “the most bearish since the bull cycle began in January 2023,” saying the market has likely exhausted most of its demand wave.
Investor Takeaway
If market-maker liquidity does not stabilize soon, spillover into ETFs, miners and corporate BTC treasuries could deepen, especially in regions with thin liquidity.
How Long Could This Liquidity Drain Last?
Lee sees a potential turning point once balance-sheet gaps are filled. Market makers may gradually rebuild capital, restore trading volumes and tighten spreads, reversing the forced-selling cycle. Historically, these liquidity shocks resolve faster in crypto than in traditional assets, but the scale of October’s liquidation makes the timeline uncertain. Key factors to watch:
- •Market-maker inventory levels: Signs of stabilization would indicate reduced forced selling.
- •ETF outflows: If outflows slow, spot liquidity could improve.
- •Funding rates: Excessively negative levels would show persistent stress, while normalization signals balance-sheet recovery.
- •Correlation with tech stocks: Heavy AI-stock selling remains a key risk for broader sentiment.
For now, the market is still digesting the shock from October’s cascade. The coming weeks will reveal whether liquidity re-enters the system — or whether the unwind continues deeper into December.