coindesk.com
The crypto market crash of early October didn't just cause wealth destruction.
It hit market makers, who are pivotal to a smooth trading experience, such that they were left holding bags of crypto, leading to the most challenging trading conditions since 2022, according to the latest report by crypto exchange BitMEX.
The crash and liquidations
The crypto market cratered on Oct. 10, with bitcoin, the leading digital asset by market value, falling from $121,000 to $107,000, according to CoinDesk data. Several altcoins, including XRP, ETH, DOGE, and others, took a deeper dive.
The sharp volatility saw exchanges, both centralized and decentralized, liquidate leveraged futures bets worth $20 billion, the highest on record.
Liquidations occur when market prices move sharply against a leveraged bet, eroding the trader's margin until it falls below the exchange's required level. Exchanges automatically close such positions to recover funds, preventing deeper losses, which often triggers a chain reaction or cascading effect: forced sales amplify price drops, causing more liquidations. Liquidation cascades have been a feature of the market for years.
Market makers hit by auto-deleveraging
However, on Oct. 10, the exchanges went a step further, employing auto-deleveraging, the final step in the liquidation process, which liquidated even profitable positions, including those of market makers, to socialize losses and shield the exchange. The ADL activates when the exchange's futures insurance funds cannot absorb losses from bankrupt (loss-making) futures positions.
Market makers, who constantly post buy and sell orders in an order book, typically run delta-neutral strategies, comprising opposing positions that balance long spot bets (actual crypto held) with equal short perpetual futures to zero out directional risk. This keeps their focus on liquidity provision rather than betting on price moves.
On that fateful day, ADL kicked in, forcefully closing market makers' short futures trades originally initiated against long spot positions as a part of a delta (market) neutral trade.
This forced liquidation of their short futures positions left them with unhedged long spot holdings, prompting them to scale back liquidity-provisioning operations. This led to the thinnest liquidity conditions since 2022. Liquidity means a market's ability to handle big buy/sell orders without wild price swings; thin liquidity amplifies even modest trades into sharp moves.
"When ADL mechanisms forcibly closed MM short hedges, these firms were left holding naked spot bags in a free-falling market. This breach of the "neutrality" promise caused MMs to pull liquidity globally in Q4, resulting in the thinnest order books seen since 2022," BitMEX said in a report titled "State of Crypto Perpetual Swaps 2025."
The breach of neutrality may have forced market makers to sell their naked long spot positions, which played a big role in pushing prices lower following the Oct. 10 crash. BTC fell as low as 80,000 on some exchanges by Nov. 21.
While prices have bounced to over $90,000 since then, weak liquidity remains a concern for many market observers.
The end of free money
BitMEX's report argued that the funding rate arbitrage, or the delta-neutral strategy, that generates risk-free money by snapping up crypto and simultaneously shorting perpetual futures is no longer attractive.
The strategy allows traders to capture the price gap between futures and spot markets, represented by funding rates, while avoiding price volatility risks. Hence, it's often referred to as 'free' or 'easy' money. Positive rates mean perpetuals are trading at a premium to the spot price and negative rates suggest otherwise.
However, what DeFi protocol Ethena started has been mimicked industry-wide, leading to a crash in the price differential or the yield.
"With billions in automated hedging flow hitting the orderbooks, the supply of shorts overwhelmingly outpaced organic long demand. The result was a collapse in funding rates," BitMEX said. "By mid-2025, the "risk-free" crypto yield had compressed to sub-4%, often underperforming US Treasury Bills."
The sub-4% yield starkly contrasts with the previous bull market, when carry trades offered yields as high as 25% or more. Clearly, the mass interest in the arbitrage has largely "arbitrage away" the price difference between the two markets.
The Trust crisis, rise of DeFi perps and equity perps
The report laid bare the dark side of crypto exchanges running as high-stakes casinos with flashy volume records masking a harsh truth: profitable traders often walked away empty-handed.
According to the report, several platforms triggered "abnormal trading behavior" clauses to freeze and seize winnings, revealing aggressive "B-book" operations, where exchanges bet directly against users, pocketing losses as profit but dodging payouts when they lose big.
It highlighted the weaponization of low-float listings, citing the MMT incident, where a "coordinated entity cornered spot supply to squeeze perp Open Interest," proving that pre-market and low-cap perps had become venues for insider washing.
The report noted the rise of DeFi trading venues like Hyperliquid, while stressing that decentralization doesn't stop manipulation.
"The Plasma ($XPL) incident demonstrated that on-chain transparency cannot protect users as much as credible CEXs can," the report said. In the Plasma incident, attackers exploited pre-launch tokens with weak oracles (price referencing), using public on-chain data as a "liquidation map" to trigger cascades.
Lastly, the report said crypto derivatives found true product-market fit in 2025 as the "backend for trading TradFi assets."
"The demand to leverage trade U.S stocks like Nvidia and Tesla outside the 9:30 AM – 4:00 PM window exploded, with crypto exchanges becoming the primary venue for speculation especially ahead of earning reports," it said.