A Crypto Market Maker Balance Sheet Crisis Could Be Dagging Down Market

The recent downward pressure on the cryptocurrency market could be the result of deep holes in the balance sheets of market makers, according to Tom Lee, chairman of Ether treasury company BitMine.

Speaking with CNBC on Thursday, Lee suggested that the Oct. 10 market crash, which saw a record $20 billion liquidated from the market, ultimately caught some market makers off-guard, causing severe liquidity issues.

With less capital to operate, combined with reduced capital from traders as their primary source of revenue, it’s a tough time for market makers, Lee said. As a result, this has also led them to shrink their “balance sheet further” in a bid to free up more capital.

“And 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. And if prices fall, they’ve got to then do more selling. So I think that this drip that’s been taking place for the last few weeks in crypto reflects this market maker crippling,” he said.  

Lee, who is also the co-founder of Fundstrat, likened the importance of crypto market makers to “central banks” and suggested that the market may face more pain for a few more weeks until the market makers’ liquidity issues are resolved.   

“Today’s stock market looks a lot like an echo of what happened on October 10th. But on October 10th, that liquidation was so big […] it really crippled market makers,” he said, adding:  

“And market makers are critical in crypto because they provide liquidity. I mean, they act almost as the central bank in crypto.”

Bitcoin (BTC) was priced at over $121,000 before the Oct. 10 crash, and has since declined back to $86,900, with most of the market following a similar pattern.  

Related: Bitcoin whale activity on track for its biggest week this year: Analysts

Lee said there may be another couple of weeks of market maker unwinding before the market starts to heal, as he pointed to a similar occurrence from 2022: 

“And so in 2022, it took eight weeks for that to really get flushed out. We’re only six weeks into it. So I kind of concur. I think crypto, Bitcoin and Ethereum are in some ways a leading indicator for equities because of that unwind. And now this sort of limping and weakened liquidity.”

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