Market volatility wiped exchange liquidity, OTC desks took charge

Cryptocurrency investors suffered one of the biggest financial hemorrhages last Friday. However, according to a report by Finery Markets, over-the-counter (OTC) desks were the “shock absorbers” that prevented the liquidation scuffle on Binance from spreading to the broader digital asset market.

Centralized and defi exchanges felt the pain of US President Donald Trump’s announcement of an additional 100% tariff on Chinese imports and new export controls on software. The statement triggered mass panic, prompting crypto holders to sell their tokens, which in turn tanked the market.

Cryptopolitan, citing data from Coinglass, reported that over $20 billion worth of leveraged crypto bets were wiped out in less than 24 hours. Bitcoin fell more than 12% from its weekly high of over $124,000, hovering near $113,000 by early Saturday morning on Bitstamp. 

More than 1.6 million traders were liquidated, and over $7 billion in positions were unwound in just one hour of trading.

Market volatility wiped exchange liquidity, OTC desks took charge

According to Finery Market’s insight, volatility in Ethereum and altcoins swept through to stable assets like Ethena’s synthetic dollar USDe, Wrapped Beacon Ether (wBETH), and Binance Staked SOL (BNSOL). The losses extended into decentralized finance (DeFi), where several pools’ liquidity was heavily drained.

USDe briefly dropped down to 65 cents on Binance when sell orders started trickling in fast, but maintained its peg on Curve, Fluid, and Bybit. Finery Markets noted the go-to crypto trading platforms had “a symptom of localized stress,” adding that panic and selling caused liquidity depletion on centralized exchanges (CEXs).

“The crisis showed the value of secondary trading conducted through OTC private rooms,” the firm noted. “This infrastructure is a firewall against systemic contagion due to the fundamental difference in order book structure.”

CEXs purportedly use visible liquidity through public order books, but OTC desks have private execution between traders. The “dark liquidity,” Finery said, helps tone down systemic risk and prevents bank-run-like scenarios triggered by mass sell orders.

“OTC markets provide a structure that allows participants to trade large volumes without revealing their positions. This mitigates panic-driven contagion during high-volatility events,” Finery wrote.

During the three-day window between October 10 and 12, trading volumes in Finery Markets’ private BTC/USDT and ETH/USDT rooms surged 107% week-on-week. In comparison, centralized platforms saw a 48% increase in the same pairs. 

This could mean large players in the day of liquidation preferred private, less-visible venues to significantly nerf risk and rebalance their portfolios.

According to a chart shared by Finery Markets, tracking the height of the liquidation event, bid-ask spreads on Binance ballooned to around 0.6%, while Bitstamp accelerated to 9.8%. Meanwhile, Kraken and Coinbase saw spreads between 1.5% and 2.5%.

By contrast, Finery Markets’ OTC platform recorded spreads below 0.4% throughout the same period. Around midnight UTC on October 11, when Bitstamp’s spread ticked upwards, Binance and Coinbase both saw brief volatility spikes, but Finery Markets bid-ask spread was comparatively flat.

Traders struggled with the ‘leverage trap’

Friday’s selloff also exposed borrowed positions placed with 10x or higher leverage, which turned dire when Bitcoin and other assets dropped double digits within hours. 

“A 10% BTC drop on a 10x position becomes a 100% wipeout,” Finery Markets’ note observed. Traders who failed to use stop-losses saw their accounts liquidated automatically as prices breached collateral thresholds, accelerating the bloodbath.

CoinGlass data indicated that liquidation volumes during the October event surpassed those of major past crashes, including the 2022 Terra collapse.

Even though most coin values had returned back to their weekly consolidating levels by Monday morning, the market has turned defensive. Derivatives analysis on Coinglass shows there is increased activity in protective contracts on Bitcoin at $95,000 and Ethereum at $3,600, where most traders are betting on a further downside. 

Still, institutional investors like Strategy, one of the largest public holders of Bitcoin, bought the dip and added its Bitcoin holdings to 640,250 coins. BTC exchange-traded funds (ETFs) are still on a roll, but they recorded $102.58 million inflows on Tuesday, according to SoSo Value data.

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