Market Maker Liquidity Crisis Hits Crypto Markets
According to Tom Lee, chairman of crypto firm BitMine and co-founder of research firm Fundstrat, the recent weakness in Bitcoin and cryptocurrency markets may be caused by severe liquidity problems among major market makers. In an exclusive interview with CNBC, Lee explained that the October 10 crash, which saw over $20 billion in positions liquidated, unexpectedly hit several market participants hard.
The October 10 Crash and Its Aftermath
Lee describes a reflexive process where market makers forced to free up capital reduce their trading balances. When prices fall, these parties must sell even more to reduce risk, creating additional downward pressure on prices. 'The continuous decline over recent weeks reflects a weakened market-maker structure,' Lee stated during his CNBC appearance.
Market makers play a crucial role in crypto markets, according to Lee. They provide trading and liquidity, functioning almost as a central bank for the market. As long as these entities face balance sheet problems, the market remains vulnerable to further declines.
Bitcoin's Price Trajectory
The Bitcoin price stood above $121,000 before the October 10 crash but has since fallen to around $87,000. Other cryptocurrencies have shown similar patterns, with Ethereum and major altcoins experiencing significant declines.
Lee expects the market could continue to suffer from position unwinding by market makers for several more weeks. He noted that a similar process in 2022 lasted approximately eight weeks. 'We're now six weeks into this phase. Bitcoin and Ethereum often lead stock markets precisely because of these types of settlements,' he explained.
Market Recovery Timeline
Only when liquidity problems are resolved can the market stabilize, according to Lee. The current situation highlights the importance of market makers in maintaining healthy trading conditions. Their withdrawal from active trading creates a vacuum that amplifies price movements and increases volatility across the entire crypto ecosystem.
Industry analysts are watching closely to see how quickly market makers can rebuild their capital positions and return to normal operations. The resolution of these liquidity issues will be crucial for determining when Bitcoin and other cryptocurrencies might resume their upward trajectory.