Snapshot:

• Bitcoin's October 10 plunge exposed how fast crypto liquidity can vanish when trading algorithms sound the red alert. The resulting liquidation cascade turned a macro jolt into a free fall.
• Market makers weren't malicious, just risk-averse, but their simultaneous pullback revealed a systemic flaw: everyone's code panics the same way.

When the Bids Vanished

On October 10, the crypto market went off-script. A White House tariff announcement on Chinese imports hit the wires; minutes later Bitcoin plunged more than 10%. What began as a macro wobble turned into a flash crash that briefly erased tens of billions in value – and exposed how thin crypto markets can be when volatility strikes.

Data from Kaiko show that order books "appeared empty" as sell orders sliced through bids across exchanges. Bitcoin fell toward $106,000 before stabilizing. The spark was obvious: tariffs. The violent reaction wasn't.

A Liquidity Void

Kaiko's data paint a clear picture: bid-side liquidity in BTC-USDT pairs sank to multi-month lows. Spreads blew out, and even the largest venues looked ghosted.

Galaxy Digital’s analyst desk summed it up bluntly: ‘High leverage, thin depth, one headline.’ Open interest was rich, risk appetite high, and once the shock hit, volatility spiked, hedging demand surged, and automated deleveraging kicked in.

Seconds before the plunge, spreads widened – suggesting algo systems saw the danger first and pulled quotes simultaneously. Kaiko called it a "voluntary liquidity gap": not a tech failure, just a collective tightening of risk.

To veterans of high-frequency trading, this was textbook. When volatility jumps, risk engines pull back. There was no conspiracy, just code executing as written.

The Blame Game

That didn't stop the finger-pointing.

Wintermute, one of crypto's biggest market makers, was accused of worsening the rout after a large Binance transfer surfaced online. CEO Evgeny Gaevoy dismissed the theories, saying liquidity providers were hit by the same automatic liquidations as everyone else. "It's often not unwilling but simply unable," he said.

The chain reaction was brutal. Hyperliquid triggered cross-margin ADL for the first time in two years; Bybit saw 50,000 shorts forcibly closed, roughly $1.1 billion in liquidations. YQ Jia, founder of blockchain scalability company AltLayer, dubbed the synchronized withdrawal of liquidity “abandonment." The action was driven by four incentives: asymmetric risk, predictive positioning, no duty to stay, and better arbitrage opportunities elsewhere.

The Counter Case

Not everyone blames the market makers. CoinGlass data shows that more than $16.679 billion in long positions were liquidated out of a total of $19.134 billion within a 24-hour period on October 10.

That suggests the plunge was less a liquidity crisis than a forced-selling spiral: once liquidation engines started dumping collateral, there simply weren’t enough bids high enough to catch the falling knife.

Market makers, defenders note, are there to quote prices not warehouse risk. When liquidation engines dump collateral, bids get filled instantly, creating the illusion that liquidity "vanished." Still, timing matters. Multiple firms throttled quoting activity within a 30-second interval — evidence that the industry's risk models share the same triggers, and therefore the same failure modes.

Stress Test or Warning Sign?

Hours later, order-book depth recovered. Market makers privately framed the episode as a "stress test," proof their kill switches worked. Kaiko's analysts were less sanguine. They saw fragility: a market built around a few algorithmic firms with no obligation to quote when things go pear-shaped.

Traditional exchanges impose duties and circuit breakers. Crypto venues rely on rebates and goodwill. When volatility spikes, incentives vanish, and so do the bids.

Fixing the Feedback Loop

Does market making infrastructure need an upgrade? Analysts have started sketching solutions:

• Quoting obligations tied to exchange privileges.
• Insurance funds modeled on real, not idealized, volatility.
• ADL circuit breakers to halt liquidation cascades.
• Transparency dashboards showing live liquidity depth.

"The tech exists," YQ Jia says. "What's missing is willpower. Until exchanges prioritize stability over short-term fees, we'll keep reliving these ‘unprecedented' events."

The Take Away

Market makers didn't cause the October 10 crash. But by stepping back en masse, they deepened it. As DeFi markets mature, "voluntary" withdrawal can feel a lot like inevitability.

They didn't light the fire. But when the flames began to spread, they opened the windows.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.