The cryptocurrency market experienced its largest sell-off event on Friday night US time, forcing the elimination of $16 billion worth of leveraged bullish bets on bitcoin. ether , solarium and the broader altcoin market. Several altcoins have plunged between 20% and 40% as the market retreated.
Naturally, bulls may wonder if the recovery could be quick or take time. Understanding the process that follows a decline like this suggests that the recovery is likely to be gradual, testing the patience of bullish investors.
“When the market goes like this, there’s usually a pretty simple playbook for the consequences,” Zaheer Ebtikar, chief investment officer and founder of Split Capital, said on X.
This is what a typical sequence looks like:
The market bleeds and market makers pause
The initial phase involves the market “bleeding” or sinking further as liquidation orders flood the exchanges, pushing prices lower. We saw that happen overnight when several altcoins, including XRP, DOGE, and others, fell to multi-month lows.
Amid this, market makers, the entities responsible for providing liquidity and ensuring orderly trading, typically temporarily step back to manage their risk and focus on “reloading by first taking large and delinquent positions on assets,” as Ebtikar noted.
It means they address price mismatches between the spot and futures markets with arbitrage games involving opposing positions in the two markets. This process prevents an immediate bounce.
Data sources stabilize
This phase refers to the period after a market crash, when the information channels that traders and market makers rely on begin to function reliably again. During the crisis, exchanges and technology systems that provide real-time updates, order book data and order executions often suffer delays or interruptions due to high volatility.
Once the data stabilizes, market makers and large traders begin absorbing important sell orders to restore market balance. These participants take advantage of liquidation orders, which receive priority in order books and make it easier to find bargains.
Given the magnitude of forced liquidations observed overnight, this absorption phase may last several days.
Market stabilization
This stage involves traders and market makers closing their long positions, which they initially acquired at bargain prices while absorbing liquidation orders, to benefit from a possible rally.
“Once traders fill up a lot, they will start to unravel as the market returns to equilibrium. This is when the market hits a local high and the Dalai Lama chart starts hitting. Some assets that have tighter supply will look better than others,” Ebtikar said.
This process is typically slow, especially over the weekend when spot ETFs do not trade, reducing overall market liquidity. This lower liquidity makes it harder and slower for traders to liquidate large positions without causing large price movements, so liquidation tends to slow down during these periods.
The market finds a floor
Over time, the market finds a floor, settling into a more stable range, and investor confidence, shaken by the crisis, begins to rebuild.
In conclusion, the large liquidations seen overnight will likely prolong the multi-step bottoming process, which will involve strategic buying of liquidation orders by market makers, liquidity challenges over the weekend, and new price anchors.
All that said, if the main risk (continued trade tensions between the United States and China) does not subside, all bets on when this will end are off.
