Bitmine Chairman Tom Lee reveals! 20 billion liquidation severely impacts market makers, triggering a chain collapse

Ethereum Reserve Company BitMine (BMNR) Chairman Tom Lee stated in a CNBC interview on Thursday that recent downside pressure in the cryptocurrency market may be due to huge vulnerabilities in the market makers’ balance sheets. Lee speculates that the market crash on October 10th led to a record $20 billion in capital being liquidated from the market, catching some market makers off guard and causing severe liquidity issues.

$20 Billion Liquidation Deals a Heavy Blow to Market Makers’ Balance Sheets

(Source: CNBC)

Lee explained that the market crash on October 10th resulted in a record $20 billion in capital being liquidated, ultimately catching some market makers unprepared and leading to serious liquidity problems. The scale of this liquidation is extremely rare in crypto history, second only to the “519 Event” in May 2021. On that day, Bitcoin’s price plummeted from over $121,000, triggering forced liquidations of numerous leveraged positions.

Market makers bore the brunt of this incident. Unlike ordinary traders, market makers place orders on exchanges to provide liquidity and earn the bid-ask spread. During extreme market volatility, their inventory positions can suddenly suffer huge losses. The $20 billion liquidation indicates a failure in their hedging strategies, forcing them to close positions at the worst possible prices, leading to significant vulnerabilities on their balance sheets.

Lee noted that due to reduced operating capital and a decline in funds from traders, who are their main source of income, market makers are in a difficult situation. Consequently, they have had to further shrink their balance sheets to free up more capital. This forced deleveraging creates a negative feedback loop: market makers cut back their quotes’ depth, market liquidity diminishes, prices become more volatile, and more liquidations are triggered.

“If their balance sheets have vulnerabilities and they need to raise capital, they will instinctively shrink their balance sheets and reduce trading. If prices fall, they are forced to sell more. So I think the ongoing decline in the crypto markets over the past weeks reflects the predicament of market makers,” Lee said. His remarks reveal a deeper mechanism behind crypto market crashes: it’s not just deteriorating fundamentals, but a collapse of the microstructure.

BMNR, traded as BitMine, with its stock ticker, provides a unique perspective through Tom Lee’s insights into market structure. As an Ethereum reserve company, BitMine’s business is closely tied to market health, and its management’s observations of market maker dynamics have firsthand value.

Market Maker “Central Bank” Role and Liquidity Crisis Impacting the Whole Market

Similarly, Lee, also co-founder of Fundstrat, compares the importance of crypto market makers to a “central bank,” stating that until liquidity issues among market makers are resolved, the market could face several more weeks of pain. “Market makers are crucial in crypto because they provide liquidity. I mean, they almost serve as a central bank in crypto markets.”

This analogy is highly precise. In traditional finance, central banks regulate liquidity and stabilize prices through open market operations. In crypto markets, market makers play a similar role: they place two-way orders on exchanges to ensure investors can buy and sell at any time, maintaining price stability. When market makers withdraw, the market loses this central bank support, and volatility can sharply increase.

“Today’s stock market looks very much like a replay of what happened on October 10th. But on October 10th, the scale of that liquidation… really hit market makers hard,” Lee said. His analysis highlights an important but often overlooked fact: crypto prices depend not only on the supply and demand balance but also on the depth of liquidity provided by market makers.

Before October 10, Bitcoin was over $121,000, then fell back to $86,900, with most assets following a similar trajectory. This widespread decline is not due to deteriorating fundamentals of individual projects but reflects systemic liquidity crisis. When market makers cut quotes across multiple assets simultaneously, the entire market feels the pressure.

Triple Effects of Market Maker Liquidity Crisis

Reduced Quote Depth: Wider bid-ask spreads, higher trading costs for investors

Increased Volatility: Lack of buffers, small orders can trigger large price swings

Chain Reactions and Forced Selling: Market makers forced to unwind positions, causing stop-loss cascades and more liquidations

This crisis impacts BMNR stock in two ways. As an Ethereum reserve firm, BitMine’s business depends on a healthy crypto environment. The liquidity crunch caused by market maker issues can affect BitMine’s asset management operations and investor confidence. Conversely, Lee’s deep analysis of market structure demonstrates the professionalism of BitMine’s management, potentially boosting investor confidence for the long term.

2022 Replay? 6 Weeks Out of 8 Weeks of Forced Deleveraging

Lee said that before the market begins to recover, a few more weeks of deleveraging among market makers may be needed. He pointed out that a similar situation occurred in 2022: “So, in 2022, it took 8 weeks for things to settle. We’re only 6 weeks into it now. I basically agree. I think cryptocurrencies, Bitcoin, and Ethereum are, to some extent, leading indicators of the stock market because they signal a correction. But now, they’re stumbling and liquidity is weakening.”

This timeframe provides clear expectations for BMNR investors. If Lee’s analysis is correct, the market may still need about 2 weeks to complete the market makers’ deleveraging process. During this period, prices may continue to be under pressure or oscillate at low levels. But once the deleveraging is complete and liquidity restores, the market could rebound rapidly.

Historical data from 2022 offers a reference. The market’s crisis then also stemmed from large-scale liquidations and balance sheet damage, taking 8 weeks to stabilize. During that period, Bitcoin continued to decline, and investor panic peaked, but after week 8, the market started to bottom out and gradually recover. If this pattern repeats in 2022, then in about 2 weeks (around early December), a turning point may emerge.

Lee’s analysis also emphasizes crypto’s role as a leading indicator of risk assets. Due to 24/7 trading and high liquidity, crypto markets tend to reflect sentiment changes faster. When cryptocurrencies lead downward, it may signal an upcoming stock market correction. This leading nature offers important risk warnings for cross-market investors.

For BMNR investors, Tom Lee’s framework offers clear guidance. In the short term, before market makers complete their deleveraging (the next 2 weeks), the market may continue to face downward pressure. Caution is advised, and overleveraging should be avoided. Once the deleveraging cycle ends and liquidity recovers, the market may rebound quickly, and investors should be prepared to increase positions. In the medium term, resolving the market maker crisis will restore normal market functions and lay the groundwork for the next rally.