Author: Coinbase Institutional Research
Key Points
Despite the ongoing panic sentiment overshadowing the entire cryptocurrency market, we believe that the liquidation event in October is more likely to mark the beginning of a medium- to long-term strengthening trend rather than a sign of weakness, creating a favorable start for a rally in the fourth quarter. However, it may take several months for the market to fully stabilize, and a gradual recovery is more probable in the medium term, rather than a surge to new all-time highs.
Summary
Following the massive liquidation event on October 10, we believe that the cryptocurrency market has reached a short-term bottom, with significant improvement in the current positioning of the market. The market seems to have reset rather than collapsed. We believe this round of sell-off has restored market leverage to a healthier structural level, which may provide support for the medium- to short-term outlook. Nevertheless, in the coming months, a slow climb is more likely than an immediate surge to new historical highs.
From a technical perspective, this deleveraging event represents more of a fundamental market adjustment rather than a solvency crisis, although the selloff in altcoins and the withdrawal of market maker orders did exert pressure on the riskiest segments of the cryptocurrency market. On the positive side, we believe this technically driven price action indicates that the fundamentals of the crypto market remain robust. Institutional investors—most of whom were unaffected by the leveraged liquidations—are likely to lead the next wave of upward movement. Although the macro environment has become more complex and risky compared to the beginning of the year, overall conditions still appear supportive.
Observing the "smart money" flows (according to a Nansen report), capital is shifting towards the EVM stack (such as Ethereum, Arbitrum), while momentum in Solana and Binance Smart Chain (BSC) is waning. It should be noted that we use smart money flows only as a screening tool—not as a buy signal—to identify the distribution of market depth, incentive mechanisms, and developer/user activity across protocols, decentralized exchanges, and blockchains. Meanwhile, stablecoin data points to capital rotation rather than fresh inflows, suggesting that short-term market rebounds will continue to rely on tactical incentives and narrative-driven rotation effects.
The Great Grain Heist
An anecdote widely circulated in the commodities trading community is the so-called “Great Grain Heist.” The incident occurred in 1973; despite its name, it was not a heist but rather a systematic and covert withdrawal of wheat and corn inventories from the open market by the Soviet Union over the course of a month. This action went undetected for a prolonged period until global grain prices surged by 30%-50%, revealing that the Soviet Union was facing a large-scale crop failure—which led to dangerously low levels of global grain supply.
The chain reaction of cryptocurrency liquidations triggered by tariffs on October 10—resulting in numerous altcoins plummeting 40%-70%—bears striking resemblance to the information dissemination mechanism of that historic event. In both cases, information asymmetry during periods of liquidity drought caused significant market dislocations, disproportionately impacting assets with lower liquidity and higher beta coefficients.
Figure 1: The Largest Liquidation Event in Cryptocurrency History
In 1973, U.S. officials failed to detect a global food shortage due to deficiencies in the agricultural monitoring system. Senator Henry Jackson accused them of either 'incredible negligence' or 'deliberate concealment.' This event spurred the development of satellite-based crop monitoring technology to prevent future information asymmetries.
The cascading collapses in the cryptocurrency sector stem not only from information gaps but also from flaws in execution mechanisms: liquidity for altcoins is fragmented across multiple exchanges, and decentralized protocols automatically liquidate over-collateralized altcoin positions when health metrics deteriorate. This often creates self-reinforcing selling pressure during price declines. Not to mention that market makers now predominantly hedge risks by shorting altcoins (due to their significantly higher beta coefficients relative to large-cap cryptocurrencies, allowing for smaller position sizes). However, the automatic deleveraging mechanism (ADL) led to many institutions abruptly closing out positions and withdrawing buy-side liquidity, exacerbating the sell-off.
Both events underscore an enduring market truth: when liquidity dries up and information asymmetry intensifies, the highest-beta, most leveraged corners of any market become the pressure relief valve, bearing the brunt of forced selling. But what happens next?
Recovery Patterns
We view this selloff as a necessary reset for the crypto market rather than the peak of the cycle, potentially paving the way for a gradual uptrend over the coming months. Prior to the October 10 event, our primary concern was that the current bull market cycle might end prematurely. In fact, a survey we conducted from September 17 to October 3 revealed that 45% of institutional investors believed the bull market had already entered its final stages.
Following the selloff, we are more confident in the directional upside potential of the crypto market. However, positioning in cryptocurrencies over the coming months will likely depend more on market structure repair than headline-driven catalysts. The chain reaction of liquidations exposed vulnerabilities in collateral standards, pricing sources, and cross-platform transfer resilience.
Figure 2. The Brief but Intense Impact of Leverage Reshapes the Crypto Market Landscape
However, leverage levels have largely reset—our systemic leverage ratio (calculated as total open interest in derivatives divided by total cryptocurrency market capitalization, excluding stablecoins) shows the current level is only slightly above that at the start of the year (Chart 2). We believe this metric will be one of the most critical indicators to monitor in the medium term. The current leverage ratio suggests that until risk management measures are harmonized and market maker depth fully restored, the market will continue to face intermittent liquidity gaps and sharper tail risks.
Looking ahead, we expect market momentum to be primarily driven by institutional inflows—as most institutions were largely unaffected by this deleveraging event. Many either maintained low leverage exposure or focused their allocations on large-cap cryptocurrencies, while retail-driven altcoins bore the brunt of the liquidation chain reaction. As institutional investment appetite recovers, the cryptocurrency market is poised for a rebound, though this process may take several months.
We therefore expect Bitcoin's dominance to gradually increase over the next 2-3 months, potentially placing downward pressure on ETH/BTC and altcoin/BTC trading pairs before the final market rotation. Notably, based on the breakeven points of straddle and strangle option strategies, the current implied probability distribution range for Bitcoin’s price over the next 3-6 months is between $160,000 and $90,000, with expectations skewed towards upward asymmetry (Figure 3).
Figure 3. Implied BTC Price Distribution Based on Breakeven Points of Straddle and Strangle Options
Tracking Capital Flows
We believe that capital flows serve as the most direct barometer of market participants’ confidence after a downturn. Following recent deleveraging, we have observed price overshooting and market narratives becoming increasingly blurred. To gauge position dynamics, we recommend focusing on “smart money” – including investment funds, market makers, venture capital firms, and consistently high-yield traders – and their current capital (re)deployment directions.
Tracking these capital flows can reveal which ecosystems are regaining depth, incentive mechanisms, and developer/user activity – i.e., areas of short-term opportunity – along with protocols, decentralized exchanges, and blockchains worth monitoring. However, this does not imply that market participants should directly purchase native tokens of these platforms, as on-chain footprints may reflect yield farming, liquidity provision, basis/funding rate arbitrage, or airdrop positioning. Additionally, it is difficult to ascertain whether smart money inflows are tactical (incentive-driven) or sustainable. We consider it more prudent to view smart money flows as a tool for filtering opportunities.
Since October 10, capital has shifted toward Ethereum L1/L2 (i.e., Ethereum, Arbitrum), while Solana and BSC have lost momentum. Ethereum and Arbitrum lead in 7-day net inflows, with momentum strengthening over the past 30 days (Figure 4). Meanwhile, capital is flowing out of Solana and BSC; although BSC outflows have moderated, they remain negative.
Figure 4. Smart Money Flows – By Chain
The catalysts behind these capital flows vary. For instance, Arbitrum restarted its incentive mechanisms and DAO initiatives in October (e.g., DRIP Epoch 4 directed rewards toward Aave lending/liquidity, Morpho, and gaming-related activities), coinciding with the redeployment of liquidity and reigniting the flywheel effect.
We believe closely monitoring tokens on the Base chain to capture potential inflection point trading opportunities may be prudent. This weekend (October 25-26), Base chain activity surged: the x402 ecosystem exhibited parabolic growth, fueled by Farcaster’s acquisition of Clanker’s issuance platform, which spurred new token launches and user traffic. This growth built upon prior catalysts – ongoing Base token speculation, open-source Solana bridging solutions, Zora’s listing on Robinhood, and Coinbase’s acquisition of Echo – collectively expanding use cases and creating more opportunities for liquidity rotation.
Meanwhile, since October 10, the sector rotation has seen the “utility + yield” narrative replace speculative operations as the mainstream trend. Amid post-crash market dislocations, yield protocols are leading smart money flows, reopening double-digit APYs (e.g., fixed/floating income combinations and funding rate arbitrage), while the NFT/metaverse/gaming sectors are being driven by strategy-oriented mechanisms (e.g., PunkStrategy’s deflationary NFT trading loop) and significant transactions (e.g., Coinbase’s acquisition of UPONLY).
Figure 5. Capital Flows – By Sector Classification
The theme of staking/re-staking continues to strengthen, with institutional products dominating headlines—Grayscale launches the first Ethereum and SOL staking-based U.S. exchange-traded product. In short, smart capital is flowing into areas with clear income paths, reliable incentive mechanisms, and institutional access points, while optimizing risk reallocation through stablecoins (Figure 5).
Stablecoin flow data also suggests a trend of capital rotation rather than an influx of new funds. Over the past month, the 30-day growth rate of stablecoins on most major blockchains, except for Tron, has shown a downward trend (Figure 6). We believe this indicates that post-crash fund flows represent redistribution rather than new inflows—liquidity is selectively moving between protocols with tangible catalysts, but there has not been a widespread surge in stablecoin supply across the system. Practically, this means that market rebounds will continue to rely on tactical incentives and narrative-driven rotations until a clear expansion in stablecoin circulating supply triggers broad-based gains.
Figure 6. Stablecoin Supply Momentum – By Chain Classification
The tokenized assets sector is a key area of institutional focus. In October, Blackrock’s BUIDL injected approximately USD 500 million each into Polygon, Avalanche, and Aptos (Figure 7). This total investment of around USD 1.5 billion underscores the value of real-world assets (RWAs) as a resilient narrative—offering stable returns (tokenized treasury yields of 4-6%) and liquidity, attracting traditional financial participation during volatile periods, while avoiding speculative bubbles that were liquidated in the October 10 chain collapse.
These deployments are gradually transcending the limitations of Ethereum (BUIDL’s initial stronghold), leveraging the strengths of each chain: Polygon provides Ethereum-compatible scalability and low fees; Avalanche, with its high-throughput subnets, emerges as an ideal choice for institutional-grade DeFi integration; Aptos utilizes the Move language’s security mechanisms to handle complex assets. While this may appear to be the selective expansion of a single participant (Blackrock), we believe that against the backdrop of heightened overall uncertainty in the cryptocurrency space, its commitment to expanding RWA (real-world asset) access channels highlights the strategic value of the RWA sector as a future growth driver.
Figure 7. Real-World Asset Flows – By Chain Classification
Do Not Overlook the Macro Environment
Finally, it is crucial to remember that cryptocurrencies are still trading within a highly complex and increasingly risky macro environment. This sell-off has eliminated the excessive leverage typical of late-cycle bull markets. However, multiple macro factors continue to weigh on investor confidence: trade frictions (e.g., tariff policies), geopolitical conflicts (e.g., U.S. sanctions on Russian oil producers), surging fiscal deficits (in the U.S. and globally), and overvaluation in other asset classes.
Despite the Federal Reserve's easing policy, the yield on the U.S. 10-year Treasury remains steady at around 4.0%, fluctuating within a range of 3.5%-4.5%. This stability partly explains why we are tolerant of steepening at the edges of the yield curve (which typically flattens during prolonged easing periods). However, we believe the trend toward a steeper yield curve may persist, and if yields rise sharply, risk assets such as U.S. equities and cryptocurrencies could face downside correction risks. For instance, this might occur when fiscal buffer mechanisms fail.
On the other hand, if long-term yields do rise with U.S. economic growth, this would reflect stronger economic fundamentals rather than policy concerns. Faster nominal growth and productivity gains can absorb higher discount rates, thereby providing robust support for risk assets, including cryptocurrencies. Notably, we believe that economists currently underestimate productivity levels, partly because factors such as artificial intelligence are enhancing labor efficiency in ways not fully captured by official statistics.
Figure 8. Rising U.S. Labor Productivity (10-Year Annualized Growth Rate)
If this is true, it suggests that the macroeconomic volatility transmitted through the discount rate channel may be diminishing for risk assets. This would shift the drivers of cryptocurrencies back toward endogenous factors such as liquidity, fundamentals, positioning strategies, and regulatory developments favorable to cryptocurrencies (e.g., the U.S. Crypto Market Structure Bill).
Conclusion
Overall, there remains significant debate about the current phase of the cryptocurrency market cycle. However, we believe that the recent deleveraging has laid the groundwork for a gradual upward trend in the coming months. Macro tailwinds such as Federal Reserve rate cuts, easing liquidity conditions, and pro-cryptocurrency regulatory changes like the SMART Act/CLARITY Act continue to support bullish expectations, potentially extending this cycle into 2026.
However, after October 10, the flow of smart money appears more selective in re-engaging with risk rather than representing a broad-based return to risk assets. These funds are shifting toward the EVM stack (e.g., Ethereum and Arbitrum) and sectors combining "utility + yield," while inflows into Solana and BSC have slowed, and stablecoin growth has decelerated. This indicates capital reallocation toward specific verticals rather than systemic injections.
Meanwhile, substantial RWA fund flows suggest institutions are expanding their on-chain presence with a prudent multi-platform strategy. In practical terms, we believe short-term rebounds will remain concentrated in areas where incentive mechanisms, product launches, and institutional access converge, although more sustainable cryptocurrency price trends may require overall liquidity to recover first. Despite lingering "panic" sentiment in the crypto market, recent deleveraging serves as a precursor to medium- to long-term strength, laying the foundation for further gains by the first quarter of 2026.
Editor/Joryn
