Wall Street strategist Tom Lee suggests the prolonged weakness in cryptocurrency markets since October 10 may be approaching its end, noting Bitcoin and Ethereum have become leading indicators for US equities. This assessment stems from market makers' balance sheet recovery cycle following severe liquidations in 2022.
On November 21, BitMine Chairman and former JPMorgan Chief Equity Strategist Tom Lee told CNBC that the October 10 liquidation event "severely impaired market makers" who function as "almost like central banks" in crypto markets by providing critical liquidity.
The Wall Street veteran compared current conditions to 2022's crypto market turmoil, noting the previous episode took eight weeks to fully resolve versus just six weeks elapsed currently. This indicates markets remain in a liquidity-impaired, reflexively weak state.
Lee observed Bitcoin's recent tendency to decline before equity markets during volatility, reflecting crypto's liquidity stress as an early warning system. He highlighted Bitcoin's October 10 downturn preceding US stocks as evidence of this leading relationship. Since then, Bitcoin has plunged from $125,000 to around $82,000.
The October Liquidation Shock Lee detailed how a stablecoin's anomalous intra-exchange price drop to $0.65 (from its $1 peg) on October 10 triggered automated deleveraging (ADL) mechanisms. This cascade liquidated approximately 2 million crypto accounts within minutes, even profitable ones.
Lee attributed the event to a "coding flaw" - the exchange used internal pricing rather than cross-exchange data for stablecoin valuation, creating systemic risk. Market makers suffered significant capital losses, forcing balance sheet contraction.
Vicious Cycle of Liquidity Drain With impaired capital, market makers entered reflexive deleveraging. Lee emphasized their "quasi-central bank" role in crypto markets - when capital-constrained, they must reduce trading activity. Falling crypto prices demand more working capital, creating a self-reinforcing downward spiral that explains recent persistent declines.
Diminished trading volumes exacerbate liquidity issues, allowing prices to keep falling without new negative catalysts.
Historical Timeline Suggests Two More Weeks Drawing parallels to 1987's portfolio insurance crash and 2009's mortgage crisis, Lee noted industry adaptations follow each crisis. Citing 2022's eight-week recovery from similar liquidations, he suggested the current six-week adjustment period implies near completion.
Lee predicted ADL mechanisms and pricing methods will be reformed post-crisis, while praising crypto's advantage over traditional finance in avoiding regulatory overreach during recoveries.
Crypto Markets as Equity Bellwethers Lee identified Bitcoin and Ethereum as developing leading indicator properties for stocks. His team observed Bitcoin's October 10 downturn preceding equities, demonstrating crypto's predictive capacity through its liquidity unwinding process.
Current equity movements resemble "echoes of October 10 events," Lee said, with crypto's automated, liquidity-sensitive systems reacting faster to systemic risks than traditional markets.