Liquidity depletion and capital withdrawal: the dangerous situation of a three-pronged attack on the crypto market

The cryptocurrency market has fallen into a vortex of multiple pressures. From on-chain data, the current situation is being attacked simultaneously by three forces: the withdrawal of institutional funds, explosive liquidations in market leverage, and extreme tightness in spot trading liquidity.

Liquidity Crisis: Market Fragility Highlights

The most direct threat comes from the collapse of liquidity in spot trading. Since the flash crash on October 11, mainstream cryptocurrencies—Bitcoin(BTC), Ethereum(ETH), Solana(SOL)—have seen their order book depth within ±2% depth decrease by 30%-40% compared to early October. This not only makes trading more difficult but also makes the market vulnerable: any medium-sized sell order could trigger a chain reaction.

For smaller coins, the situation is even worse. Tokens like Shiba Inu, with smaller market caps, have experienced even larger declines in order book depth, reflecting a risk-averse mindset among market makers. When liquidity is extremely scarce, any price fluctuation can be amplified infinitely.

What does this mean? It means the market structure is becoming unstable. A seemingly insignificant technical breakout could evolve into a large fluctuation.

Leverage Liquidations: Chain Reaction from Perpetual Contracts to DeFi

The flash crash on October 11 triggered the largest liquidation wave in crypto history. Open interest(OI) in perpetual contracts decreased by over 30% within hours, dropping straight from a peak of over $90 billion.

Worse still, these liquidations were not limited to exchanges. The DeFi lending markets also experienced severe deleveraging:

• Stablecoin Loan Collapse: After Ethena USDe decoupled from the dollar, loans collateralized by USDe plummeted 65%, triggering a full liquidation of synthetic dollar leverage
• Ethereum Ecosystem Hit Hard: Borrowing in WETH and liquidity mining tokens(LST) decreased by 35%-40%, causing arbitrage trading strategies to collapse instantly
• Market Makers Retreat: Funding rates turned neutral or negative, indicating that bullish sentiment was thoroughly suppressed

The problem is: these liquidation events are still ongoing. The market has not fully digested this round of leverage cleansing, and the fragile liquidity structure means that any new shock could trigger secondary liquidations.

Capital Flow Reversal: ETF and Crypto Reserves in Trouble

Once a stable source of funds for the crypto market, institutional players are now beginning to withdraw.

ETF Redemption Wave: Since mid-October, Bitcoin spot ETFs have experienced continuous net outflows, totaling $4.9 billion—this is the largest since April 2025. Although BlackRock’s IBIT still holds 780,000 BTC, the ongoing redemption signals indicate shaken institutional confidence.

Crypto Asset Reserves(DAT) Struggling: Major DATs led by Strategy remain profitable (holding 649,870 BTC with an average cost of $74,333), but their accumulation rate has slowed significantly. When asset prices fall, the premium of DAT stocks shrinks, and new capital inflow weakens considerably. Smaller emerging DATs are even more struggling—the deteriorating market environment directly hampers their expansion capabilities.

On-chain revenue indicators also confirm this trend: short-term holders(Holdings<155 days)’s SOPR indicator has fallen to -23%, entering the loss zone, which has historically been a signal of retail panic selling.

Macroeconomic Pressure Persists: Underlying Drivers of Market Sentiment

The root cause of all this points to macroeconomics.

Bitcoin’s correlation with traditional assets has exposed its nature as a “risk asset.” In this year’s market:

• Gold rose over 50%: Central banks worldwide continue to buy, risk aversion is high
• Tech stocks underperformed: Nasdaq entered a downturn in Q4, and the AI supercycle expectations are being reassessed
• Rate cut expectations reversed: The market significantly downgraded the probability of a Fed rate cut in December

When risk aversion dominates the market, crypto assets like Bitcoin are among the first to be affected. Although positive factors like regulatory friendliness continue to emerge, in the wave of macro risk aversion, these voices seem insignificant.

Reality or Opportunity?

From certain perspectives, the current cleansing is also purifying the market:

• Leverage has been effectively cleared, making the structure healthier
• Short-term speculators’ chips have been washed out, and the average cost for long-term participants has been restored
• Systemic risk has not been completely eliminated but has been greatly reduced

What are the key variables? Three:

1. When will ETF funds flow back? If net inflows resume, it will be a strong signal of market stabilization
2. When will liquidity be rebuilt? The recovery of spot market depth is a barometer for whether the market is truly stabilizing
3. When will macro sentiment reverse? If expectations for rate cuts reignite and tech stocks regain attention, risk assets will have a breathing space

When these three conditions are met simultaneously, the crypto market can truly break free from the current predicament. Until then, the market will continue to sway between macro risk aversion and internal structural repair.