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I'll start this video by saying this is an interesting theory posed by Tom Lee recently. He was on CNBC and he proposed a theory for why crypto has been falling so drastically in a single direction without much of a bounce back. So right now Bitcoin is sitting at $85,000. And what he's suggesting is that there is something underlying not with the code of crypto.
I think this is where CNBC misquot everything hearing lies with how crypto markets are made and how large private capital is deploying funds. We'll look at the video and I think this is really important here to read between the lines of what he's saying. Try to figure out if this theory holds up and what are the consequences for us crypto holders here.
So let's take a look at what he says here. was so big, Brian, it really crippled market makers. And a market makers are critical crypto because they provide liquidity. They act almost as the central bank in crypto. And if they've got a hole in their balance sheet that they need to raise capital for, they need to reflexively reduce their balance sheet, reduce trading, and if prices fall, they've got to then do more selling.
So, I think that this drip that's been taking place for the last few weeks in crypto reflects this market maker crippling. And so, in 2022, it took 8 weeks. All right, this is quite interesting. He's talking about market makers. Traditionally speaking, in theory, market makers are supposed to not hold any crypto assets.
They're just supposed to provide liquidity both up and down, right? Okay. And these function across the board in crypto and a lot of them work with centralized exchanges like like Binance, Bybit, etc. So what they do is when there's not enough buy orders, they kind of place to there and then they kind of place some buy and sell orders with all with automation.
So they make the markets a lot more reactive. So they're supposed to be market neutral. That's a definition of a market maker. They're financial tools meant to provide liquidity to market without really taking any positions. So in theory, what he's saying is that they didn't act like real market makers.
There's two possibilities of what's happening with market makers. One is that they were actually holding crypto and then trying to provide a upward pump to the market. And this is technically highly illegal because like you know what in what's supposed to happen in regulated markets, they're absolutely not supposed to play around and have any positions on a market.
But now he goes to point out one big issue. There's a lot of what they call automated processes in crypto. One of them is called and that's an automatic liquidation feature that would take place if someone's account or their collateral drops in price. It's essentially like a margin call. Um on a specific exchange, a stable coin's price varied from other exchanges.
stable coin should stay at a dollar. It dropped to 65, but that only happened within the exchange quotes within this exchange because of liquidity that triggered an ADL, an automatic liquidation across many accounts. It wiped out as that spread across other exchanges, right? Because liquidations cascade almost too many crypto accounts got wiped out even though minutes before they were actually profitable accounts.
So, who is behind this? like who's the they in the market makers and they got hit. Who's the they? Well, you know, Brian, I'm I I am aware of names, but because Okay, so this is quite interesting. All right, like let's let's break this down a few bits. So, he's talking about autom uh ADL liquidation, which happens because of leverage.
So essentially because the market makers are supposed to function provide liquidity on both sides. Let's break this down step by step. Okay. So ADL automatically leverage our events trigger when something wrong happens. Technically speaking, none of these market makers should ever trigger an ADL. They're just supposed to be having these algorithms a lot of money trading, putting in orders, put orders on both sides.
And technically speaking, they're not supposed to have any exposure to the market, but then they're just like, you know, moving between these sides as people trade. So what he's talking about is perhaps a black swan event, a miscalculation with all these algorithms. And this is entirely possible because if you're programming a bot and these bots trade into stables, stables are meant to be at a dollar.
But if the stables drop in price, this is not accounted for. It could be possible that the guys that are behind these trading algorithms didn't foresee and didn't program for certain stable coins dropping tremendously in value in a short amount of time. And because that happened, it triggered a second black swan event where this massive cascade is happening and potentially there was no buyers for the longs maybe.
So things kept going down as they got liquidated. In 2017, certain exchanges were hit. The market too fast for them to react and then they ended up holding when the market tanked which resulted in exchanges losing money. Now coming to 2025, exchanges don't do that. They automatically liquidate people who are holding accounts.
They're not playing market making. So they rely on external market makers. And these market makers had a fundamental error that caused them to lose money when they shouldn't have. So that's what's he's saying here. There's a lot to read between the lines here because he doesn't want to point out names.
It always happens in finance, especially at higher amounts of money and more private markets where you don't want to dox anyone for being a bad actor because you still have to work with them, right? Potentially it could be the case. You can actually read between the lines of hesitation here. He really wants to point out the bad actors but is holding himself back.
Not someone who wants to name names. I think what you should keep in mind is that this error is essentially a bug, a code error because they I think in retrospect they would have pulled pricing from across exchanges to set the price for that stable coin rather than rely on internal quotes. So you can see that hesitation in his voice.
You can really see that he wants to reveal more. He and in many ways he's like he's sweating here. He's like, "Oh man, I really want to tell you. I really want to tell you who the bad actors are. I want to point them out. All right, one by one, like shoot them if they can because he's lost a lot of money, but he can't.
He's just explaining what was explained to him. This has resulted in market makers and traders having less capital and as crypto prices drift lower because trading volumes drop, they need to then have more capital available, which means they shrink their balance sheet further. So this is then that reflexive weakening.
Okay, so this is kind of interesting. was a cascading effect. Market makers who are meant to be market neutral, they're not meant to play on the price of crypto. There could be two reasons. One is what one he's saying. There's a bug in the system that instead of being neutral, market neutral instead of not just holding cap holding money but not playing on the markets, that's what they should have been doing.
There was a bug that triggered an event that caused them to lose money. All right, it's it's the essence of saying, you know, everything was positive, all the accounts are good, and it's gone. Interestingly enough, could this happen? Absolutely. We saw a cloud flare happen that was meant to be bulletproof that the entire internet relied on break down.
And it could be that the code that billions of dollars of crypto depended on could have broken down and instead of having no position, people had positions. This could be something that's very possible, but he's not obliged to name names. And because everything's happening on centralized exchanges, we don't really see onchain evidence of who they are.
I actually did a search for this. So, it could be the case that certain um trading firms like Wintermute and Cumberland, they could take they could have taken losses here. And Winter Mut and Cumberland, they hold a lot of clients money. And then they have to explain to the clients that, hey, we lost your money, but they don't want to reveal it to the public, which is maybe what Tom Lee got.
He probably got on a call with these guys, one of these market makers to see what's happening. And the market makers have to explain to him what happened. But the market makers are not obliged to explain to us, the community, what happened because they still want to keep their reputation. And it's a situation where no one gains from telling people the truth of what happened.
Because if you're a fund and you lost money there and the market makers are telling me ask you, "Hey, look man, you can get your money back, but just keep your mouth shut." The market makers themselves don't want to shoot themselves in the foot and say, "Hey, look, we messed up and lost a bunch of money for people." They're not going to put a press release and say that.
It's a situation where no one wins. Whether it's clients, market makers, or exchanges, they just want to keep this under wraps as much as possible. No one has any incentive to tell the truth about what's happening. We can only really guess or take someone's word for it or read between the lines. So by reading between the lines of what Tom Lee is saying, it's kind of implicit that the people that he's working with has lost a lot of money or people that he's involved with have lo lost a money a lot of money due to a programming glitch and because they lost a lot of money for themselves and on behalf of their clients, they have to start selling crypto in order to stay afloat.
This is a cascading effect and it takes weeks to recover. I hate the term glitch. I can't stand the term glitch. things go down at the airport and they say, "Well, a glitch is your flight to did not take off." That's not a glitch. That's more than a glitch. It's a word that is used to describe pretty serious automation issues, software problems, crashes for some reason that they try to minimize.
Is this some kind of a a software bug that's causing part of this? I'm trying to follow exactly what you're hinting around about. Uh yeah, I mean Brian it is. I mean uh for instance in 1987 portfolio insurance was the quote glitch. This is on national to make this for a national TV audience are dumbing down the facts and Tom Lee here is sweating and people just money just vanished.
Money that was supposed to be market neutral just vanished and that's what he's saying in 1987. And so the industry learned and then never offered that again. In 2009, it was really that the collateral wasn't secure in real estate in these packaged subprime mortgages. Now, the industry learned and they recoded that.
I'm talking about Wall Street. But then regulators came in and like overregulated. That's that was the negative effect of that. In crypto, this code of ADL and the way they pull prices never going to happen again. The good news is we're not going to have overregulation in crypto, but now we have to deal with that liquidation effect.
2022 was a big liquidation and it took eight weeks. All right. So, we have to read a few things between his lines, right? So, at his current point, how much did Tom Lee lose? He's sitting on $2.7 billion of unrealized losses. He's got to answer to someone. That's why that's probably the that's the reason why he's on national TV.
He's got to answer someone why he lost money. Why is the varian going down? And then you he thought it was going up, right? Now, it's going down. So he's he's pinning this on a glitch with market makers and market makers not doing the job they're supposed to do. They're supposed to hold people's money, keep the markets neutral, provide both up and down liquidity, but it could be the case that they got caught with their pants down with the software bug code.
Very possible. So we have exchange reports that order book depth, so the amount of orders being placed on Binance is down 33% and by bit also 20 to 40%. Market makers work across all exchanges which is why when they get hit when something bad happens to them all exchanges get affected and that cascading effect shows true.
So we do see evidence to back this up. Tom Lee is not pointing to you know broad market issues which I would say is also a contributing factor. The reason why he's not putting this on is because when you explain to investors rather blame a bug that's not foreseen rather than something that you could foresee which earnings or market conditions.
You're supposed to be the guru who reads the market but you can't blame the fact that you're not a good guru. You can only say yeah it's a soft link glitch. That make sense? So reading between the lines here he's going to avoid some of the other contributing factors to this market breakdown. But that being said, the order book reduction makes sense.
And it also makes sense that because of this black swan event with the market makers being caught with their pants down and potentially losing their clients a lot of money. That means right that's going to spook the market. The market's going to pull back even more and cause this dump that's happening without a retrace.
So I actually do believe that there's quite a lot of effects that's back. It it actually explains quite a lot of what's going on in the market. We were looking for a bounce back, looking for Ethereum to bounce back from 3,300 to 3,600. But two factors, if the market makers essentially didn't do their job, if that is the case, then investors who invest in them or who put their money with them, they will know and then that will spook them and that will trigger additional sell off and this market gloominess.
So I actually do do think this actually quite explains quite a bit and I feel like it's sad that we have to know this from guessing between the lines and this happens a lot with finance because no one's really going to explain what's really happening because what's really happening might be illegal or it might be a massive malfunction that breaks certain companies.
FDX was a case where they did surrender and then we managed to figure out what was happening. But the problem is that the market makers involved, they still want to keep their jobs. They still want to continue making money from the market because we know if they stop making money from the market, they can't pay their investors back, right?
So, we're in a situation where we really don't know. So, guys, that's my take on it. I do think that this is highly possible and very probably what's happening. A stable coin deep like USD pegging is really a black swan event and that could trigger massive liquidations for the market maker. that was meant to be market neutral to be no longer market neutral and we saw that in the past as well.
So, and last resting things here, right? So, Tommy points this out that it takes around 8 weeks to recover from this. It could potentially be longer, right? Because of the sell off and because we're entering a gloomy situation as well. We are basically facing a black swans event which is why crypto fell without much news.
It was mostly speculative news. But maybe within the market makers, they know exactly what's happening. They know exactly which programs were the problems. How much money was lost by those programs and which investors they have to answer to. So we won't know what's really happening until maybe three, four, five months down the road when real news surfaces and people start filing lawsuits.
That's when it happens. So be careful out there on market guys. Um this could explain what's happening. It's quite gloomy until market makers raise enough funds or until more capital gets injected into the space. Do we see a full recovery? With that guys, take care guys. Thank you guys so much for watching this video. Uh, see you next one.
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