The recent downward pressure on the cryptocurrency market may be the result of a severe liquidity crisis among market makers, according to Tom Lee, co-founder of Fundstrat and chairman of BitMine. He suggests that major firms were caught off-guard by a sudden market crash in October, leaving them with significant holes in their balance sheets.

The October 10 Catalyst

Speaking with CNBC, Lee pointed to the October 10 market crash as the event that triggered the current issues. The crash saw a record $20 billion liquidated from the market, which he believes severely wounded market makers who are essential for market stability. Bitcoin, for instance, was trading at over $121,000 before the event and has since dropped to levels around $86,900.

With less capital to operate, these firms have been forced to shrink their balance sheets to free up funds. Lee explained that this creates a vicious cycle. “If they’ve got a hole in their balance sheet that they need to raise capital, they need to reflexively reduce their balance sheet, reduce trading,” he said. “And if prices fall, they’ve got to then do more selling.”

A Crippled Market Engine

Lee described this ongoing pressure as a “drip” that has been steadily pulling the market down for weeks. He emphasized the critical function of these firms, comparing them to the financial system’s central banks. “Market makers are critical in crypto because they provide liquidity,” Lee stated. “They act almost as the central bank in crypto.” When they are crippled, the entire market feels the pain.

Looking ahead, Lee suggested the market may not see a recovery for a few more weeks. He drew a parallel to a similar event in 2022, which took eight weeks to fully resolve. “We’re only six weeks into it,” he noted, implying that the process of market makers unwinding their positions isn’t finished yet.

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