The crypto market is in one of its sharpest pullbacks of the year, with Bitcoin sliding to around $85,000, Ethereum falling below $2,800, and XRP dropping after recent highs. The total crypto market cap has erased billions within hours, falling more than 7%.
Market analyst Tom Lee, co-founder of Fundstrat, explained on CNBC what is happening behind the scenes and why this crash may be tied to deeper issues in crypto liquidity.
Lee says the downturn began on October 10 when a major automated liquidation event shook the crypto ecosystem. A stablecoin on one exchange briefly fell from 1 dollar to 65 cents because of low liquidity. The sudden drop triggered a chain reaction:
Lee describes market makers as the central bank of crypto. When they lose money and pull back, the market becomes extremely fragile.
After the October shock, major market makers began repairing their balance sheets. This has caused:
Lee compares it to 2022 when a similar wave of liquidations took about eight weeks to clear. He says we are six weeks into a similar cycle right now.
Lee confirms that the problem began with a software bug. The exchange used its own internal price feed instead of multiple sources. When the price briefly broke, an auto deleveraging system liquidated accounts that should not have been touched. The error wiped out nearly two million accounts in minutes.
Crypto operates with weaker liquidity than equities. When market makers withdraw, prices fall faster than stocks. This is why Bitcoin started dropping before the stock market turned red.
Lee says large holders who want to hedge Bitcoin cannot easily hedge inside the crypto market. Many hedge through MicroStrategy stock because it offers better liquidity and options. This has caused heavy shorting of MicroStrategy, a deep drop in the stock, and additional pressure on Bitcoin.
Lee believes this is a bull market correction, not the beginning of a long bear market. He thinks the forced selling cycle is almost finished. His estimate is that Bitcoin could dip toward $77,000 and Ethereum toward $2,500 before a sharp reversal.
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