Economist Raul Pal gave his assessment of the background to the recent decline in Bitcoin.
Pal said the current pullback began with the sharp selloff and widespread liquidations on October 10 and continues today.
Raul Pal said that the events of October 10 were significant from a market structure perspective and drew attention to the technical problems experienced by Binance, the world's largest cryptocurrency exchange. During that period, market maker APIs were disabled, causing liquidity to suddenly dry up, Pal said. This, combined with the inability of market makers to support liquidity, led to on-chain liquidations, which spread to other exchanges.
Pal said that because some exchanges have their own market makers or use mechanisms to maintain prices, they have had to handle large liquidations in both large and small crypto assets. Comparing this process to the 2010 U.S. stock market “flash crash,” Pal recalled that a similar sudden liquidity shock occurred back then.
Pal noted that tens of billions of dollars in liquidity support are currently being gradually withdrawn from the market, and argued that positions created during such extraordinary times should be reduced over time, as would large-scale market-making operations. He said the process had resulted in huge losses for some parties and huge gains for others, adding that what is happening now should not be seen as market manipulation.
According to Pal, if there is one intervention worth mentioning, it would be temporary liquidity support aimed at preventing a complete collapse of prices when market makers become dysfunctional due to technical issues. He said the main reason for the current decline is that the entities providing this liquidity are in the process of reducing risk.
Pal said these sales are having a significant impact on prices as liquidity is currently low, adding that year-end audits and year-end liquidity constraints are accelerating the process. Nevertheless, Pal concluded his assessment by saying, “This period will pass,” indicating that the current situation is not permanent.
*This is not investment advice.
