Author: Coinbase Institutional Research
Key points
1. Despite the continued panic gripping the crypto market, we believe the October liquidation events are more likely the prelude to a medium- to long-term uptrend than a sign of weakness, creating a good start for the fourth quarter rally.
2. However, it may take several months for the market to fully stabilize, and in the medium term it is more likely to show a gradual recovery rather than soaring to a record high.
3. Over the past 30 days, “smart money” in the crypto space has flowed mainly around the EVM technology stack, and away from Solana and BSC.
summary
Following the massive liquidation event on October 10th, we believe the cryptocurrency market has reached a short-term bottom, with current market positioning significantly improved. The market appears to have simply reset rather than crashed. We believe this sell-off has restored market leverage to a healthier structural state, which could provide support for the medium to short term. However, a slow climb rather than a direct surge to all-time highs is more likely in the coming months.
From a technical perspective, this deleveraging event is more of a fundamental market adjustment than a solvency crisis, although the altcoin sell-off and market maker order cancellations did put pressure on the riskiest sectors of the cryptocurrency market. On the positive side, we believe this technically driven rally indicates that the fundamentals of the crypto market remain robust. Institutional investors—most of whom were unaffected by the leverage liquidations—may lead the next upward move. While the macroeconomic environment is more complex and riskier than at the beginning of the year, it remains generally supportive.
Observing the “smart money” in this space (according to a Nansen report), fund flows are shifting towards EVM stacks (such as Ethereum and Arbitrum), while momentum is waning for Solana and Binance Smart Chain (BSC). It’s important to note that we use smart money flows only as a screening tool—not a buy signal—to identify market depth, incentive mechanisms, and the distribution of developer/user activity across protocols, decentralized exchanges, and blockchains. Meanwhile, stablecoin data points to capital rotation rather than new fund inflows, suggesting that short-term market rallies will continue to rely on tactical incentives and narrative-driven rotation effects.
Grain robbery
A well-known anecdote circulates in the commodities trading world: the “Great Food Robbery.” The event occurred in 1973, but despite the name, it wasn’t actually a robbery. In reality, it was the Soviet Union systematically and secretly withdrawing wheat and corn stocks from the open market over a month. This action went undetected for a long time until global food prices surged by 30%-50%, revealing a massive crop failure in the Soviet Union—leading to a dangerously low global food supply.
The cryptocurrency liquidation chain reaction triggered by tariffs on October 10th—leading to a 40%-70% plunge in many altcoins—bears a striking resemblance to the information dissemination mechanism of the events of that year. In both incidents, the information asymmetry during periods of liquidity shortage created significant market misalignment, causing disproportionate damage to assets with lower liquidity and higher beta coefficients.
Figure 1: The largest liquidation event in cryptocurrency history
In 1973, U.S. officials failed to detect a global food shortage, stemming from flaws in the agricultural monitoring system. Senator Henry Jackson accused them of either “unbelievable negligence” or “deliberate cover-up.” This incident spurred the development of satellite crop monitoring technology to prevent future information asymmetry.
The chain reaction of crashes in the cryptocurrency space stemmed not only from the information gap but also from flawed execution mechanisms: altcoin liquidity was scattered across multiple exchanges, and decentralized protocols automatically liquidated over-collateralized altcoin positions when health indicators deteriorated. This often created self-reinforcing selling pressure during price declines. Not to mention that market makers now primarily hedge risk by shorting altcoins (due to their significantly higher beta compared to large-cap coins, allowing them to maintain smaller position sizes). However, due to automatic deleveraging (ADL), many institutions suddenly liquidated their positions and withdrew their buy-side liquidity, exacerbating the sell-off.
Both events confirm a timeless market truth: when liquidity dries up and information asymmetry intensifies, the corner of the market with the highest beta and leverage becomes a pressure relief valve, bearing the brunt of forced selling. But what happens next?
Recovery pattern
We believe this sell-off is a necessary reset in the crypto market, rather than a cyclical peak, and may pave the way for a slow rise in the…