Source: Coinbase Research
Translation: Golden Finance
Summary:
Following the large-scale liquidation event on October 11, Coinbase believes that the cryptocurrency market has bottomed out and is rebounding, with a clearer position structure. The market seems to be resetting rather than collapsing. We believe that this sell-off has restored the systemic leverage levels to a structurally healthier state, which may provide directional support in the medium to short term. Nevertheless, a slow recovery is more likely in the coming months rather than a surge to new historical highs.
Mechanically, the deleveraging event is more of a market mechanism adjustment rather than a test of solvency, although it has indeed put pressure on the riskiest segments of the cryptocurrency market, leading to a sharp decline in altcoins and market makers withdrawing quotes. On a positive note, we believe that the technical-driven nature of this trend indicates that the fundamentals of the cryptocurrency market remain robust. Institutional investors—many of whom were not impacted by the leverage shock—are likely to lead the next round of increases. We believe that despite the highly complex macro environment and risks being higher than at the beginning of the year, it still supports the cryptocurrency market.
According to a report by Nansen, "smart money" in the sector has flowed into the EVM stack (such as Ethereum and Arbitrum), while Solana and the BNB chain have lost momentum. Nevertheless, we still consider the flow of smart money as a filtering criterion rather than a buy signal, to identify the gathering points of market depth, incentive mechanisms, and developer/user activity across different protocols, decentralized exchanges (DEX), and blockchains. Meanwhile, stablecoin data reflects capital rotation rather than new capital injection, indicating that in the short term, the rebound will still rely on strategic incentives and narrative-driven capital rotation.
The Great Grain Robbery
Among commodity traders, there is a widely circulated anecdote often referred to as "The Great Grain Robbery." This event occurred in 1973, and despite its name, it was not a real robbery. More accurately, it was the Soviet Union secretly and systematically withdrawing large quantities of wheat and corn from the open market within a month. This event initially did not attract much attention until global food prices surged by 30% to 50%, at which point it became clear that the Soviet Union was suffering from a massive crop failure, leading to dangerously low global food supplies.
The cryptocurrency liquidation wave triggered by tariffs on October 11—resulting in many altcoins dropping by 40% to 70%—bears a striking resemblance to the information dynamics of that time. In both cases, the information asymmetry during periods of low liquidity caused significant market chaos, with illiquid, high-beta assets suffering disproportionately.
Chart 1. Recent Largest Liquidation Events in Cryptocurrency History
In 1973, U.S. officials failed to recognize the global food shortage due to an inadequate agricultural monitoring system, leading Senator Henry Jackson to accuse them of being either "extremely negligent" or "deliberately concealing" the truth. This prompted the development of satellite crop monitoring technology to prevent future occurrences of information asymmetry.
In the case of cryptocurrency, this wave of sell-offs did not merely stem from an information gap but rather from structural execution issues: the liquidity of altcoins is now dispersed across multiple exchanges, and decentralized protocols automatically liquidate over-collateralized altcoin positions when health metrics deteriorate. This often creates self-reinforcing sell pressure as prices begin to fall. Moreover, market makers are now mostly hedging risks by shorting altcoins (as altcoins have a higher beta relative to large-cap cryptocurrencies, allowing them to maintain smaller position sizes). However, due to the automatic deleveraging (ADL) mechanism, many market makers suddenly liquidated their positions and completely withdrew buy-side liquidity, exacerbating the sell-off.
Both events highlight an eternal market truth: when liquidity disappears and information asymmetry increases, the segments of any market with the highest beta and leverage will become pressure release valves, leading to concentrated forced sell-offs. But what happens next?
Recovery Pattern
We believe that the deleveraging sell-off on October 11 was a necessary adjustment for the cryptocurrency market rather than a peak in the cycle, potentially laying the groundwork for a slow rise in the coming months. Before the October 11 event, we were most concerned that the current bull market cycle might end too early. In fact, a survey we conducted from September 17 to October 3 showed that 45% of institutional investors believed we were in the later stages of a bull market cycle.
After the sell-off on October 11, we are even more convinced of the upward potential of the cryptocurrency market, although we believe that the movements of cryptocurrencies in the coming months will depend more on the repair of market structure rather than major events. The October 11 liquidation wave exposed vulnerabilities in collateral standards, pricing mechanisms, and the stability of transfers between different trading venues.
Chart 2. Short-term Sudden Impact of Leverage Reshapes Cryptocurrency Market Landscape
However, leverage has largely returned to normal, as evidenced by our systemic leverage ratio (based on the total amount of outstanding derivative contracts divided by the total market capitalization of cryptocurrencies excluding stablecoins), which currently shows that leverage is slightly above the levels at the beginning of the year (Chart 2). We believe this will be one of the key indicators to watch closely in the medium to short term. We believe that the current leverage levels indicate that the market may experience intermittent liquidity gaps and more pronounced tail volatility until risk control mechanisms are aligned and market maker depth fully normalizes.
Looking ahead, we expect that the strengthening of the market will primarily be driven by institutional capital inflows, as institutional investors are largely insulated from the deleveraging events. Many institutions either maintain low leverage levels or primarily focus their investments on large-cap cryptocurrencies, while altcoins held by retail investors bear the brunt of the liquidation shock. As institutional demand recovers, we may see a rebound in the cryptocurrency market, but this may take several months.
Therefore, we expect Bitcoin's dominance to gradually increase over the next 2-3 months, which may exert 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 implied market probability distribution for Bitcoin prices over the next 3-6 months currently ranges between $90,000 and $160,000, with an asymmetric upward bias in expectations (Chart 3).
Chart 3. Implied Distribution of Bitcoin Price Expectations Based on Straddle and Strangle Option Breakeven Points
Following the Flow of Funds
We believe that the flow of funds is the most direct indicator of market participants' confidence after a market downturn. After the recent deleveraging, we have seen prices rise excessively, while the market narrative has become unclear. To better understand position dynamics, we believe it is crucial to focus on the current (re)allocation direction of "smart money" (including investment funds, market makers, venture capitalists, and consistently high-performing traders).
Tracking these fund flows can help us understand which ecosystems are regaining depth, incentive mechanisms, and builder/user activity—that is, which areas are gathering recent investment opportunities and which protocols, decentralized exchanges (DEX), and blockchains should be focused on. That said, this does not necessarily mean that market participants should purchase the native tokens of these platforms, as on-chain activity may reflect yield farming, liquidity provider (LP) allocations, basis/funding arbitrage, or airdrop strategies. Additionally, we cannot always clearly determine whether the bids from smart money are more strategic (incentive-driven) or more persistent. Therefore, we believe it is best to view the flow of smart money as a tool for filtering specific investment opportunities.
After October 11, funds have shifted towards Ethereum L1/L2 contracts (such as Ethereum and Arbitrum), while Solana and BNB have lost upward momentum. Ethereum and Arbitrum lead in net inflows over the past 7 days and have continued to grow over the past 30 days (Chart 4). Meanwhile, funds are being withdrawn from Solana and the BNB chain; although the outflows from the BNB chain have eased, they remain negative.
Chart 4. Smart Money Flow—By Chain
The catalysts for these fund flows vary. For example, Arbitrum restarted its incentive mechanisms and DAO projects in October (e.g., DRIP Phase 4 will reward lending/liquidity activities related to Aave, Morpho, and gaming), while simultaneously redeploying liquidity and restarting the capital cycle.
We believe it may be wise to closely monitor tokens on the Base chain for potential turning point trading opportunities. From October 25 to 26, activity on the Base chain surged, with the x402 ecosystem showing parabolic growth, and the acquisition of Clanker by Farcaster also drove the issuance of new tokens and an influx of user traffic. This growth is built on early catalysts, including ongoing speculation on Base tokens, the open-source Solana bridge, Zora's launch on Robinhood, and Coinbase's acquisition of Echo, all of which have expanded application coverage and increased the rationale for liquidity inflows.
Meanwhile, since October 11, the industry rotation trend has leaned more towards "utility + yield" strategies rather than speculative strategies. As the market reopens with double-digit, point-adding annual yields (e.g., fixed/floating yield combinations and funding rate arbitrage) after the financial crisis, yield protocols have led the natural flow of funds; while the NFT/metaverse/gaming sectors have regained vitality driven by strategic mechanisms (e.g., the deflationary NFT trading cycle of PunkStrategy) and significant transactions (e.g., Coinbase's acquisition of UPNONLY).
Chart 5. Smart Money Flow—By Sector
With Grayscale launching the first ETH and SOL staking ETP in the U.S., institutional investors are flocking to the market, and the staking/re-staking theme remains strong. In short, savvy investors are gravitating towards areas with clearer yield paths, more reliable incentive mechanisms, and closer ties to institutional investors, selectively redeploying risks using stablecoins (Chart 5).
The flow of stablecoins also indicates that what we are seeing is capital rotation rather than a significant influx of new funds. Over the past month, the growth rate of stablecoins across most mainstream blockchains has declined, except for Tron (Chart 6). We believe this suggests that the post-crash capital flow is a redistribution rather than an increase—liquidity is selectively shifting between protocols with active catalysts, but there has not been a widespread surge in stablecoin supply. In fact, this means that the rebound may still rely on strategic incentives and narrative-driven capital rotation before a more noticeable increase in stablecoin circulation supply can genuinely drive most tokens up.
Chart 6. Stablecoin Supply Momentum—By Chain
The tokenized asset sector is a key area of focus for institutional investors. In October, BlackRock's BUIDL invested approximately $500 million in three companies: Polygon, Avalanche, and Aptos (Chart 7). This total investment of about $1.5 billion highlights the resilience of real-world assets (RWA), attracting participation from traditional financial institutions during market volatility, as it offers stable returns (with tokenized government bond yields of 4-6%) and liquidity, avoiding the speculative bubbles that were cleared during the October 11 crash.
These deployments are no longer limited to Ethereum (BUIDL's initial platform) but are fully leveraging the advantages of various chains—Polygon offers Ethereum-compatible scalability and low fees, Avalanche provides high throughput subnets ideal for institutional DeFi integration, and Aptos offers security through the Move language for handling complex assets. While this may appear to be a selective expansion by a single participant (BlackRock), we believe that in the context of increasing overall uncertainty in the cryptocurrency space, BlackRock's commitment to expanding access to RWA underscores the significant potential of the RWA sector as a future growth point.
Chart 7. Real-World Asset Flow—By Chain
Don't Forget the Macroeconomic Environment
Finally, it is essential not to forget that cryptocurrencies are still trading in a highly complex and increasingly risky macroeconomic environment. The sell-off has eliminated the excessive leverage common in the later stages of a bull market. However, various macro factors have intensified the uncertainty in investor sentiment: trade tensions (such as tariffs), geopolitical conflicts (such as U.S. sanctions on Russian oil producers), soaring fiscal deficits (including those of the U.S. and other countries), and overvaluations in other asset classes.
Despite the Federal Reserve's easing policies, the yield on 10-year U.S. Treasury bonds remains stable at around 4.0%, fluctuating between 3.5% and 4.5%. This stability partly explains why we are not overly concerned about the trend of a steepening yield curve (typically, during prolonged easing policies, the yield curve tends to flatten). However, we believe that the trend of a steepening yield curve may continue, and if yields surge, higher-risk asset classes like U.S. stocks and cryptocurrencies may face downward correction risks. For instance, this could occur if fiscal buffers are weakened.
On the other hand, if long-term yields do rise with U.S. economic growth, it would more reflect an enhancement of economic fundamentals rather than policy considerations. Faster nominal growth and productivity improvements can withstand higher discount rates and provide solid support for risk assets, including cryptocurrencies. In this regard, we believe that economists are currently underestimating productivity, partly because factors like artificial intelligence are increasing the speed and efficiency of labor, which is not fully reflected in official statistics.
Chart 8. U.S. Labor Productivity Growth (10-Year Annualized Growth Rate)
If this is the case, it suggests that the impact of macroeconomic fluctuations on risk assets through discount rates may be diminishing. This would shift the drivers of cryptocurrencies back to endogenous factors such as liquidity, fundamentals, positioning, and favorable regulatory developments for cryptocurrencies (e.g., the U.S. cryptocurrency market structure bill).
Conclusion
Overall, the current phase of the cryptocurrency market cycle remains a topic of intense debate, but we believe that the deleveraging event from a few weeks ago has laid the groundwork for steady increases in the coming months. We are confident that macro-positive factors such as Federal Reserve interest rate cuts, liquidity easing, and regulatory measures favorable to cryptocurrencies like the GENIUS Act and CLARITY Act continue to support a bullish market and may extend the cycle into 2026.
Nevertheless, the capital flows after October 11 resemble a selective re-risking rather than a broad re-entry into risk areas. These funds have shifted towards the EVM tech stack (such as Ethereum and Arbitrum) and the "utility + yield" sectors, while the capital flows in Solana and the BNB chain have cooled, and the growth rate of stablecoins has slowed. This indicates that funds are being redistributed to specific verticals rather than a systemic capital injection.
At the same time, the influx of substantial RWA funds indicates that institutional investors intend to expand their on-chain operations, but they will do so cautiously and diversely. In fact, we believe that the short-term rebound will continue to focus on areas where incentive mechanisms, product launches, and institutional support intersect, although a more sustainable cryptocurrency price trend may require a restoration of overall liquidity first.
While the sentiment in the cryptocurrency market remains in a state of "panic," we believe that the recent deleveraging is, in fact, a precursor to medium- to long-term strengthening, laying the foundation for further increases in the first quarter of 2026.
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