The crypto market experienced its largest liquidation event on record Friday evening US time, forcing leveraged bullish bets worth $16 billion on Bitcoin. ether , Solana and the broader altcoin market. Several altcoins crashed between 20 and 40% as the market retreated.
Naturally, bulls may wonder whether the recovery could be quick or take time. Understanding the process that follows a crash like this suggests that the recovery will likely be gradual, testing the patience of optimistic investors.
“When the market turns like this, there’s usually a pretty simple game plan for the consequences,” Zaheer Ebtikar, chief investment officer and founder of Split Capital, told X.
Here’s what a typical sequence looks like:
The market is bleeding and market makers are taking a break
The initial phase involves the market “bleeding” or sinking further as liquidation orders flood the exchanges, driving prices down. We saw this happen overnight as several altcoins, including XRP, DOGE and others, crashed to their lowest levels in several months.
Amid this, market makers, the entities responsible for providing liquidity and ensuring orderly trading, typically step back temporarily to manage their risks and focus on “replenishing by first underwriting large spot securities and perp shares on assets,” as Ebtikar noted.
This means that they correct price asymmetries between the spot and futures markets with arbitrage games involving opposing positions in the two markets. This process prevents an immediate rebound.
Data flows stabilize
This phase refers to the period following a stock market crash, when the information channels that traders and market makers rely on begin to function reliably again. During the crash, exchanges and technology systems providing real-time updates, order book data and order execution often experience delays or outages due to high volatility.
Once the data flow stabilizes, market makers and large traders begin to absorb large sell orders to restore market balance. These players capitalize on liquidation orders, which have priority in order books and facilitate bargain hunting.
Given the scale of forced liquidations observed overnight, this absorption phase may extend over several days.
Market stabilization
This step involves traders and market makers closing their long positions, which they had initially acquired at advantageous prices while absorbing liquidation orders, to take advantage of a potential rebound.
“Once traders fill their long positions, they will begin to unwind to spot and perp when the market returns to equilibrium. This is when the market reaches a local maximum and the Dalai Lama chart begins to peak. Some assets that are tighter in supply will look better than others,” Ebtikar said.
This process is typically slow, especially on weekends when spot ETFs are not operating, reducing overall market liquidity. This lower liquidity makes it harder and slower for brokers to unwind large positions without causing large price movements, so unwinding tends to slow down during these periods.
The market finds a floor
Eventually, the market finds a bottom, settling into a more stable range, and investor confidence shaken by the crash begins to recover.
In conclusion, the large liquidations observed overnight will likely prolong the multi-stage flooring process, involving strategic purchases of liquidation orders by market makers, liquidity concerns over the weekend, and re-anchoring of prices.
That being said, if the major risk – continued US-China trade tensions – does not subside, all bets are off as to when this will end.
