October’s crypto downturn left market makers overstocked with coins, putting a brake on trading, BitMEX reports.

BitMEX Report: October Crypto Crash Hits Market Makers, Squeezes Liquidity

The early October 2025 crypto crash did more than erase billions—it disrupted the market’s plumbing. Market makers, who keep trading orderly, were left holding massive crypto positions, resulting in the thinnest liquidity conditions since 2022, according to BitMEX’s latest report.

Bitcoin fell from $121,000 to $107,000 on October 10, while major altcoins, including XRP, ETH, and DOGE, plunged even further. The sudden volatility triggered $20 billion in leveraged futures liquidations across centralized and decentralized exchanges, setting a new record.

From Liquidations to Auto-Deleveraging

When leveraged positions move against traders, exchanges automatically liquidate them to recover margin. On October 10, exchanges went further, triggering auto-deleveraging (ADL)—a mechanism that closes even profitable positions when insurance funds can’t cover losses. Market makers, normally running delta-neutral strategies that balance long spot holdings with short futures, were hit hard.

ADL forcibly closed their short futures, leaving them exposed with unhedged long spot positions. This breach of neutrality forced many to pull back from liquidity provision, creating extremely thin order books. With limited liquidity, even small trades caused sharp price swings.

“ADL forced market makers to hold naked spot positions in a falling market. The resulting liquidity withdrawal produced the thinnest order books since 2022,” BitMEX said in State of Crypto Perpetual Swaps 2025.

The forced unwinding contributed to further price declines, with BTC dipping to $80,000 on some exchanges by November 21. Although prices have since recovered to over $90,000, liquidity remains fragile.

The End of “Risk-Free” Arbitrage

Delta-neutral funding rate arbitrage, once considered low-risk “free money,” has lost its appeal. The strategy profits from price differences between spot and perpetual futures while avoiding directional risk. But widespread adoption caused funding rates to collapse.

“Billions in automated hedging flows flooded order books, overwhelming organic long demand and collapsing funding rates. By mid-2025, risk-free crypto yields had fallen below 4%, underperforming U.S. Treasuries,” the report said.

Previously, such trades could deliver yields above 25%, illustrating how mass adoption has arbitraged away profits.

Exchanges, DeFi, and Market Risks

The report also highlighted structural issues in crypto trading. Some exchanges froze or seized profits under “abnormal trading behavior” clauses, exposing aggressive B-book practices where exchanges bet against users. Low-float listings and pre-market manipulation remained vulnerabilities, with the MMT incident showing how coordinated actors cornered spot supply to squeeze perpetual open interest.

DeFi platforms like Hyperliquid have grown, but BitMEX stressed that decentralization doesn’t eliminate manipulation. The Plasma ($XPL) incident showed how on-chain transparency alone can’t protect users from exploitative liquidation strategies.

Finally, crypto derivatives have become a major venue for leveraged trading of traditional assets. Trading of U.S. stocks like Nvidia and Tesla outside standard market hours surged, with crypto exchanges emerging as the primary platform for speculation, especially ahead of earnings announcements.