Bitcoin dipped to nearly $60,000 early this month, wiping out large chunks of value across the crypto market and evaporating some trading assets.
Most observers pinned the slide on macro forces, including the capitulation of spot ETF holders (and potential rumors of funds blowing out their positions). Yet another quieter force, one that typically keeps trading running smoothly, likely played a big role in crashing the spot price.
That force is market makers, or dealers, who continuously post buy and sell orders in the order book when you trade, keeping liquidity strong so trades run smoothly without significant delays or price jumps. They are always on the opposite end of investors’ trades, making money on the bid-ask spread, the small gap between the purchase price (bid) and the sale price (ask) of an asset, without betting on whether prices will rise or fall.
They hedge their exposure to price volatility by buying and selling actual assets (such as bitcoin) or related derivatives. And sometimes these hedging activities end up accelerating the ongoing move.
That’s what happened between February 4 and February 7, when bitcoin fell from $77,000 to nearly $60,000, according to Markus Thielen, founder of 10x Research.
This episode shows bitcoin’s options market increasingly fluctuating its spot price, mirroring traditional markets where market makers quietly amplify volatility.
According to Thielen, options market makers were “short gamma” between $60,000 and $75,000, meaning they held bags of short (call or put) options at those levels without enough hedges or protective bets. This made them vulnerable to price volatility around these levels.
When bitcoin fell below $75,000, these market makers sold BTC in the spot or futures markets to rebalance their hedges and remain price neutral, injecting additional selling pressure into the market.
“The presence of approximately $1.5 billion in negative option gamma between $75,000 and $60,000 played a critical role in accelerating Bitcoin’s decline and helps explain why the market rallied sharply as the final large gamma cluster near $60,000 was triggered and absorbed,” Thielen said in a note to clients on Friday.
“Negative gamma means that options traders, who are typically counterparties to investors buying options, are forced to hedge in the same direction as the underlying price movement. In this case, as Bitcoin fell to the $60,000-$75,000 range, traders became increasingly short gamma, requiring them to sell bitcoinged as prices fell to stay locked in.”
In other words, hedging by market makers established a self-feeding cycle of falling prices, forcing dealers to sell more, further depressing prices.
Note that the market maker’s hedging is not always bearish. At the end of 2023, the corresponding short options were above $36,000. When Bitcoin’s spot price rose past this level, they bought BTC to rebalance, sparking a quick rally above $40,000.
