On October 11, 2025, the cryptocurrency market experienced an unprecedented flash crash. Bitcoin's price plummeted from its peak, leaving the market in despair. Initially, public opinion pointed to geopolitical issues, macroeconomic factors, or some sudden policy changes. However, more than a month later, as the dust began to settle, the truth emerged.

1. A Misunderstood Crash

Tom Lee, co-founder of Fundstrat and chairman of BitMine, revealed on CNBC that the root cause of this crash was not the macro narratives people imagined, but rather a structural short circuit stemming from the core engine of the market coming to a halt—a “financial black hole” that exploded on the balance sheets of market makers, triggering a chain reaction of liquidity depletion.

2. The Market's “Invisible Central Bank”: What Are Market Makers?

To understand this crisis, one must first grasp the role of market makers in the crypto world. Tom Lee provided a sharp analogy: “Market makers are essentially like the (cryptocurrency) central bank.”

● Providers of Liquidity: Market makers provide instant trading liquidity by continuously placing buy and sell orders. They act as the “lubricant” of the market, ensuring that investors can buy or sell assets at reasonable prices at any time, maintaining the normal operation of the market.

● Earners of Spreads: Their profit model relies on high-frequency trading, earning small spreads between buy and sell prices. This is a delicate system that depends on the smooth functioning of the market.

● Stabilizers of the System: Under normal circumstances, their presence can effectively dampen abnormal price fluctuations and absorb minor market shocks. They are the “invisible hand” hidden beneath market order.

3. Catastrophic Moment: What Happened on October 11?

On October 11, an extreme one-sided market completely destroyed this delicate system.

● Model Failure: The severe and unprecedented price volatility rendered the risk hedging models that market makers relied on completely ineffective. The value of the assets they held (such as Bitcoin and other cryptocurrencies) plummeted sharply, while their liabilities remained.

● Massive Losses: According to Tom Lee's analysis, on that day alone, the losses for large market maker groups reached $19 billion to $20 billion. This enormous hole was the “financial black hole” that exploded on their balance sheets.

● Safety Net Breaks: When the “invisible central bank” itself suffered a heavy blow, the safety net it provided for the entire market also broke. Liquidity, the oxygen on which the market relies, was instantly drained.

4. Death Spiral: The Vicious Cycle of Liquidity Depletion

The emergence of the “financial black hole” triggered a series of ruthless mechanical sell-offs, dragging the market into a death spiral.

● Self-Salvaging Sell-Offs: To fill the capital gap, meet margin requirements, and “stop the bleeding,” market makers had no choice but to massively sell off their high-quality liquid assets (including Bitcoin and Ethereum) to recover cash. This was precisely when liquidity providers became liquidity extractors.

● Order Book Drought: Tom Lee pointed out that at the market's most severe moment, the order book depth shrank drastically, with liquidity evaporating by 98%. This meant the market became extremely fragile, where a small number of sell orders could breach multiple price points, triggering a new round of declines.

● “Crypto Version of Quantitative Tightening”: This was not a policy tightening initiated by the Federal Reserve, but an endogenous “quantitative tightening” triggered by the market's struggle for survival. Market makers collectively withdrew funds, similar to banks tightening credit during a crisis.

● Predatory Trading and Chain Liquidations: In a thin liquidity environment, predatory traders seized the opportunity to deliberately suppress prices through small sell orders. Each price drop would trigger more forced liquidation orders from leveraged traders, and these liquidations, lacking buy support, further exacerbated the decline. At this point, prices no longer reflected the intrinsic value of assets but merely mirrored the temporary failure of market mechanisms.

5. Path to Recovery: What Stage Are We In?

As of late November, the market is in the sixth week post-disaster. Historical experience (such as similar crises in 2022) indicates that pure liquidity crises typically require about eight weeks to gradually alleviate.

● Recovery of Market Makers: Currently, the surviving market makers are rebuilding their “firewalls” through three major measures:

○ Reducing Positions: Continuing to control risk exposure and lower positions.

○ Increasing Capital: Seeking external capital injections to fill the capital gap.

○ Hedging: Adopting more conservative and robust risk management strategies.

● Movements of “Smart Money”: During the market's most panicked moments, some institutions saw opportunities. For example, BitMine Immersion Technologies purchased 54,000 ETH at an average price during the crash, valued at approximately $173 million. This action indicates that professional participants view this crisis as a temporary liquidity shortage, rather than a fundamental reversal of the cryptocurrency's long-term fundamentals.

● Current Market Status: The most intense “bleeding period” seems to have passed, but the market's “ecological pool” remains murky. The entire system is still fragile, liquidity has not fully recovered, and prices are exceptionally sensitive to any news.

6. Lessons and Outlook: Where Are Investors Positioned?

This crisis has delivered a heavy lesson to every market participant.

● Distinguishing “Malfunction” from “Decay”: The core test investors face now is the patience to discern signals from noise. It is crucial to recognize that this is a “mechanical failure” of the market (liquidity mechanism short circuit), not “organ decay” (permanent deterioration of fundamentals). Confusing the two in panic may lead to relinquishing valuable assets at the bottom.

● The Value of Liquidity: In the modern financial system, liquidity is far more fundamental than faith and narratives. It is the “oxygen” of market life. Once deprived of oxygen, even the highest quality assets can suffocate in the short term.

● Potential for Rebound: Liquidity is like a compressed spring, and its return often triggers a rapid “revenge rebound.” Once market makers complete their balance sheet repairs and begin providing liquidity again, combined with potential favorable policies (such as support from a new Trump administration), the market is likely to see a strong upward momentum.

● Final Advice: Tom Lee's analysis reveals the underlying logic of market operations. In the face of still weak market walls, cautious asset allocation, strict risk control, and a profound understanding of market mechanisms themselves are key for investors to survive and even thrive in the next wave of turmoil. Do not lose hope in the darkest moments, nor forget the lessons when the dawn begins to break.

The flash crash on October 11 was a chain disaster triggered by the collapse of the market's core pillar—market makers. It profoundly reveals that in the highly financialized cryptocurrency market, liquidity is not only a driver of prosperity but can also be an accelerator of collapse. Understanding and respecting this mechanism is essential to navigate through bull and bear markets and achieve long-term stability.

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