On October 10, a shocking glitch in the stablecoin market sent ripples through the entire cryptocurrency ecosystem, leading to a dramatic price drop to $0.65 on one exchange. This technical error triggered a cascade of automatic liquidations that left nearly two million accounts wiped out in mere minutes, according to Tom Lee, the founder of Fundstrat Global Advisors.
Stablecoin Error Sparks Market-Wide Liquidations
Tom Lee elaborated on this unprecedented event, clarifying that the drop was not a reflection of market sentiment or a reaction to macroeconomic factors, but rather a flaw in the system’s underlying software. The error activated the auto-deleveraging mechanism—commonly referred to as ADL—which systematically closed leveraged positions across various trading pairs, creating a domino effect that rapidly spread throughout the trading platforms.
Lee confirmed that this incident alone resulted in over 1.9 million accounts being liquidated. As these mass liquidations unfolded, market makers found themselves overwhelmed, forced to withdraw liquidity to mitigate losses. The concern was not about investor sentiment but a critical software malfunction that rattled the very foundations of liquidity in the crypto market.
Market Makers Forced to De-Risk
The repercussions of this event were swift and severe. Major market makers, who play a fundamental role in providing liquidity, incurred significant losses that destabilized their balance sheets. In response, many opted to de-risk, further drying up liquidity and compounding the selling pressure across leading cryptocurrencies such as Bitcoin and Ethereum.
As Lee noted, “The software bug essentially blew a hole in the capital structure of these key participants.” The resulting vacuum of liquidity not only prolonged the market downturn but also heightened the selling pressure, mimicking patterns from previous downturns, such as the infamous market crash of 2022.
Bitcoin and Ethereum Fell Below Key Support Levels
In the wake of the October 10 incident, both Bitcoin and Ethereum plunged below critical technical support levels. Lee emphasized that these declines were not related to broader economic indicators like inflation or interest rates; rather, they arose from the immediate aftermath of the liquidation event.
Interestingly, this decoupling from macroeconomic dynamics is unusual for digital assets, which typically mirror the movements of other risk assets. This incident highlights vulnerabilities in the crypto infrastructure, especially concerning leveraged products and auto-liquidation systems, that were not previously taken into account.
Outlook and Expected Bottom
Looking forward, Tom Lee predicts that Bitcoin could hit a low around $77,000 while Ethereum may find support near $2,500 during this tumultuous period. Drawing from historical trends, he believes that steep selloffs are often followed by vigorous recoveries once selling pressure dissipates.
Lee suggests it usually takes around eight weeks for the market to heal from these distortions. His analysis points to the fact that once the clouds of uncertainty lift and fresh capital begins to flow back in, a robust recovery may be on the horizon.
He also highlighted MicroStrategy, a company recognized for its Bitcoin investment, as a key indicator of market movements. Keeping track of MicroStrategy’s activities can provide insights into institutional sentiment regarding Bitcoin.
Despite recent price drops, Lee affirmed Ethereum’s value proposition, calling it a “neutral, 100%-uptime blockchain” that remains undervalued relative to Bitcoin as we look towards 2025.
