Compass Investments

Crypto markets may have been shocked for a reason that few saw coming – not because of panic selling, not because of macro news or news about ETFs, but because of a glitch that caused historic losses.

Highlights: Tom Lee believes that the recent sharp decline in cryptocurrencies was triggered by a technical glitch in pricing, not market sentiment.

A short-term miscalculation in determining the price of stablecoin allegedly triggered automatic forced closures, affecting about two million accounts.

liquidity evaporated, market makers retreated, prolonging the downtrend long after the initial anomaly.

This is the theory put forward by Fundstrat’s director of research, Tom Lee, who is convinced that the downturn was nothing like a normal correction.

Was the collapse due to a pricing error?

Lee says that what looked like a massive abandonment of digital assets was actually the result of a single technical glitch. Sometime around October 10, on one of the platforms, stablecoin briefly lost its peg. Instead of trading around one dollar, it settled at $0.65, but not because of an issuer crash, but because of a temporary lack of liquidity on that particular trading pair. This seemingly minor inaccuracy turned out to be quite serious.

Lee claims that the erroneous quote went straight to the exchange’s internal system of forced closing of positions, which took the false value for reality and began to automatically liquidate positions. In a matter of minutes, profitable traders found themselves at a loss on paper. The effect of the suddenness spread beyond the original exchange, causing a chain reaction of forced closures elsewhere.

He estimated that about two million crypto accounts were forcibly closed as a result of this chain reaction.

Although the name of the exchange was not mentioned in the report, Lee pointed out that the incident occurred on the USDe market of the Binance exchange, involving the USDe stablecoin issued by Ethena Labs. According to him, a short-term liquidity shortage in the pair served as the spark that ignited the whole situation.

According to Lee, the real problem was not the initial drop, but its aftermath. Market makers, who are the key liquidity providers for the entire cryptosphere, suffered significant losses. When their positions were compromised by the price error, they were forced to urgently reduce risk to stabilize their portfolios.

With liquidity shrinking dramatically, prices continued to fall for weeks, even though the “spark” itself lasted only a few seconds.

Lee’s version turns the conventional view of market panic on its head: the sell-off was driven not by psychology, but by mechanics. He concludes that the fall reflects the vulnerability of a system where automated trading reacts faster than human judgment, and where the slightest price disruption can be the trigger for a crisis.