The Oct. 10 market crash, which resulted in the liquidation of $20 billion from crypto markets, has inflicted severe damage on the balance sheets of market makers. This situation could potentially drive weeks of continued selling pressure, according to Tom Lee, chairman of BitMine. The liquidity crisis among these critical intermediaries may extend the period of price weakness.
Market makers, caught off-guard by the historic liquidation event, are now experiencing capital constraints that compel them to undertake additional asset sales. With reduced operating capital and diminished trading revenue, these firms are forced to shrink their balance sheets further to free up essential resources. This situation can create a downward spiral, where falling prices trigger reflexive selling.
Lee drew a parallel between market makers and central banks within crypto ecosystems, underscoring their vital role in providing liquidity. The October crash significantly crippled these entities, and the market continues to feel the aftershocks weeks later. Bitcoin, which traded above $121,000 before the October event, has since declined to $82,900.
The Fundstrat co-founder suggested that markets might endure several more weeks of difficulty before market maker balance sheets fully recover. He referenced a similar occurrence in 2022 that required eight weeks for a complete unwinding process, noting that current markets are only six weeks into this unwinding phase.
Lee positioned Bitcoin and Ethereum as leading indicators for broader equity markets due to the ongoing liquidity unwind. The weakened state of market makers restricts their capacity to absorb selling pressure, thereby amplifying price movements in both directions across digital assets.
Thursday's stock market movements mirrored the Oct. 10 liquidation event, Lee observed. This pattern suggests that a healing in crypto markets could foreshadow stabilization in traditional assets as well. Market makers must successfully complete their capital raising efforts and balance sheet repairs before normal trading conditions can be expected to return.
The analysis highlights structural issues within market maker operations rather than fundamental problems with the crypto assets themselves. Once these intermediaries restore their financial health, normal liquidity provision should resume across both DeFi and centralized exchanges.