Market makers were left holding heavy coin inventories after October’s crypto slump, slowing trades, according to BitMEX.

BitMEX Report Shows October Crash Devastated Market Liquidity and Trading Strategies

The crypto market’s early October 2025 crash did more than wipe out billions—it disrupted the very mechanics of trading. Market makers, essential for orderly markets, were left holding large crypto positions, creating the thinnest liquidity conditions seen since 2022, according to BitMEX’s latest annual report.

Bitcoin dropped from $121,000 to $107,000 on October 10, while several major altcoins—including XRP, ETH, and DOGE—suffered even steeper losses. The sharp downturn triggered $20 billion in leveraged futures liquidations across centralized and decentralized exchanges, the largest ever recorded.

How Liquidations and Auto-Deleveraging Amplified the Crash

Liquidations happen when leveraged trades move against a trader, eroding margin below exchange requirements. Exchanges automatically close these positions, often causing cascading price drops. On October 10, exchanges went further, activating auto-deleveraging (ADL). This mechanism closes even profitable positions, including those held by market makers, to absorb losses the exchange’s insurance funds cannot cover.

Market makers typically maintain delta-neutral positions, offsetting long spot holdings with short perpetual futures to minimize directional risk while providing liquidity. On the crash day, ADL forcibly closed these short futures, leaving market makers exposed with unhedged long spot positions.

The result: a sharp reduction in liquidity and some of the weakest order books since 2022. With thin liquidity, even modest trades caused outsized price swings, compounding the market’s volatility.

“When ADL forcibly closed market maker short hedges, firms were left holding naked spot bags in a free-falling market. This breach of neutrality caused liquidity to dry up globally in Q4, producing the thinnest order books since 2022,” the report noted.

The forced unwinding of long positions contributed to further price declines, with BTC dipping to $80,000 on some exchanges by November 21. Although prices have recovered to above $90,000, liquidity challenges persist.

Delta-Neutral Strategies No Longer “Free Money”

BitMEX highlighted the declining appeal of delta-neutral funding rate arbitrage, previously seen as low-risk, “risk-free” trading. This strategy profits from price gaps between spot and perpetual futures markets while avoiding directional exposure.

“Automated hedging flows flooded order books, with short supply exceeding natural long demand, collapsing funding rates,” the report said. “By mid-2025, risk-free crypto yields fell below 4%, often underperforming U.S. Treasuries.”

In contrast, during the previous bull market, similar trades offered yields above 25%, illustrating how widespread adoption has arbitraged away profits.

Exchanges, DeFi, and Market Manipulation

The report also revealed structural risks 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 were highlighted as recurring issues, with the MMT incident demonstrating how coordinated actors cornered spot supply to squeeze perpetual open interest. While DeFi trading venues like Hyperliquid have grown, BitMEX stressed that decentralization does not eliminate manipulation. The Plasma ($XPL) incident showed that on-chain transparency cannot fully protect users from exploitative liquidation strategies.

Finally, the report noted that crypto derivatives are now a key venue for leveraged trading of traditional assets. Demand surged for trading U.S. stocks such as Nvidia and Tesla outside regular market hours, with crypto exchanges serving as the primary platform for speculative activity, particularly ahead of earnings announcements.

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