The cryptocurrency market downturn in early October did more than just diminish asset values.
It severely impacted market makers—key players who ensure smooth trading operations—leaving them burdened with unwanted crypto holdings. This situation resulted in the most difficult trading environment since 2022, as detailed in a recent analysis by the crypto exchange BitMEX.
The Market Collapse and Massive Liquidations
On October 10th, the crypto market experienced a significant plunge. Bitcoin, the dominant digital currency by market capitalization, dropped sharply from $121,000 to $107,000 according to CoinDesk data. Numerous altcoins such as XRP, ETH, and DOGE suffered even steeper declines.
This extreme volatility triggered exchanges—both centralized and decentralized—to liquidate leveraged futures positions totaling an unprecedented $20 billion.
Liquidations happen when price movements strongly oppose leveraged bets. As traders’ margin falls below required thresholds set by exchanges, their positions are automatically closed to prevent further losses. This process often sparks a domino effect: forced sales push prices down further causing additional liquidations—a phenomenon known as liquidation cascades that have long been part of crypto markets.
Market Makers Affected by Auto-Deleveraging
However, on that day exchanges implemented auto-deleveraging (ADL), an advanced liquidation step which closes even profitable positions—including those held by market makers—to distribute losses fairly and protect the exchange’s financial health. ADL activates when futures insurance funds cannot cover bankrupt positions’ losses.
Market makers typically employ delta-neutral strategies: they hold offsetting long spot assets (actual cryptocurrencies) alongside short perpetual futures contracts to neutralize directional risk while providing liquidity through continuous buy and sell orders on order books.
The activation of ADL forcibly closed these short futures trades that were hedging their long spot holdings as part of this neutral strategy.
This sudden closure left them exposed with unhedged long spot assets during a falling market and compelled many to reduce liquidity provision activities dramatically—the thinnest liquidity conditions witnessed since 2022 emerged as a result. Thin liquidity means markets struggle to absorb large trades without sharp price swings; even modest transactions can cause significant volatility under such conditions.
“When ADL mechanisms forcibly shut down short hedges held by market makers (MMs), these firms were stuck holding naked spot bags amid plummeting prices,” BitMEX explained in its “State of Crypto Perpetual Swaps 2025” report. “This breach of neutrality led MMs worldwide to withdraw liquidity during Q4 resulting in order books becoming exceptionally thin—the worst seen since 2022.”
This loss of hedge neutrality likely forced many MMs into selling their uncovered long spot holdings which contributed substantially to downward pressure after October’s crash. Bitcoin prices fell below $80,000 on some platforms around November 21st before recovering somewhat above $90,000—but concerns over fragile liquidity persist among analysts today.
The End of “Free Money” Strategies
The BitMEX report also argued that traditional funding rate arbitrage strategies—which involve simultaneously buying crypto assets while shorting perpetual futures contracts for risk-free profits—have lost much appeal recently.
This approach exploits differences between futures contract prices and underlying spot asset values represented via funding rates while avoiding exposure to price fluctuations altogether—and has been considered “easy”, or “risk-free”, money for traders.
A positive funding rate indicates perpetual contracts trade at premiums relative to spots whereas negative rates suggest discounts.
However, a trend initiated by DeFi protocol Ethena has spread industry-wide causing yields from this arbitrage opportunity—the gap between future premiums and spots—to collapse drastically.
“With billions flowing through automated hedging hitting order books continuously,” supply for shorts far exceeded organic demand for longs,” summarized BitMEX. “By mid-2025 this caused funding rates—and thus ‘risk-free’ yields—to compress below four percent often underperforming US Treasury Bills significantly.”