Novogratz: Crypto Crash Wiped Out 30% of Market Makers

The October 10th flash crash originated with what Novogratz described as a critical oracle price malfunction at Binance, one of the world’s largest cryptocurrency exchanges. This technical error specifically impacted a synthetic stablecoin, creating a domino effect that rapidly spread through the ecosystem. ‘It started really by, you know, at Binance, they had an oracle which set price misfunction,’ Novogratz told Anthony Scaramucci during their ‘All Things Markets’ interview. The incorrect pricing data triggered automatic stop-loss orders across multiple platforms, setting in motion a liquidation cascade that would ultimately wipe out nearly a third of market makers on platforms like Hyperliquid.

The initial dislocation quickly bled into levered perpetual markets, including Hyperliquid and Uniswap, where the combination of high leverage and automated liquidations turned a localized problem into a market-wide crisis. As prices declined, margin calls and forced liquidations created a self-reinforcing downward spiral. Novogratz emphasized that the unique structure of perpetual futures—credited to Arthur Hayes and his team—created particularly dangerous conditions for liquidity providers. ‘As longs get liquidated, they’re paired off against shorts,’ he explained, noting that market makers holding offsetting positions across different exchanges found themselves exposed when the rapid collapse prevented effective hedging.

At the heart of the crash’s severity lies what Novogratz identifies as crypto’s distinctive leverage culture. Unlike traditional investors who might target moderate returns, crypto participants often embrace high-risk strategies with substantial leverage. ‘What people don’t understand about crypto is that the crypto investor doesn’t play for 10, 11, 12 percent returns,’ Novogratz observed. ‘Crypto investors call themselves degens with pride. They want to turn one into 15. And so they trade a very volatile asset with a lot of leverage.’ This appetite for amplified returns, while potentially lucrative in stable markets, creates extreme fragility during periods of stress.

The concentration of leverage in perpetual futures markets proved particularly destructive during the October crash. Novogratz highlighted how the design of these instruments, while innovative, creates unique risks for market makers who provide liquidity across multiple venues. ‘You could be short and you lose your short position. Well, if you’re long on another exchange against that short position, you’re shit out of luck. And that happened to a lot of market makers.’ This structural vulnerability meant that what might have been a manageable pricing error in traditional markets became a catastrophic event that eliminated 30% of market makers on affected platforms.

The immediate aftermath saw significant damage to market infrastructure and participant psychology. Novogratz reported that the crash ‘did a lot of damage to the fabric of the market,’ with substantial losses in both liquidity and retail capital. ‘We lost a lot of liquidity in the market. We lost a lot of retail punters who lost their stack,’ he noted, adding that recovery would be gradual. ‘It takes a while for Humpty Dumpty to get put back together again.’ The crash drove Bitcoin to what Novogratz called ‘maximum pain points’—$80,000 for BTC, $1.80 for XRP, and $125 for Solana—levels that tested market resilience and investor confidence.

Despite recent rebounds, Novogratz attributes the recovery primarily to macro factors rather than healed market sentiment. ‘Now we bounce up. We bounce because of the Fed. But we’re not out of the woods,’ he cautioned. While he expects Bitcoin to approach $100,000 by year-end, he anticipates significant selling pressure at those levels. ‘I do think Bitcoin will climb back towards $100,000 by the end of the year, but there’ll be sellers waiting there. We’ve done some medium-term damage to the psychology of the market.’ This assessment reflects the ongoing tension between new institutional inflows through vehicles like IBIT and profit-taking by early adopters, with Novogratz noting one $9 billion seller representing a third of IBIT’s annual flows.

Beyond immediate market dynamics, Novogratz sees the crash as part of a broader transition in how crypto is valued and understood. The industry is moving ‘from just being a story—’we’re the most important industry… we’re going to decentralize the world’—to ‘show me what crypto actually does,” he observed. This shift toward fundamental analysis means that ‘some businesses are making money. Some businesses aren’t. There are some token ecosystems that make common sense to an investor and there’s some that all feel like they’re just an association.’ This maturation process, while healthy long-term, creates short-term volatility as the market recalibrates.

The macro environment provides a contradictory backdrop—structurally challenging due to reduced market making capacity and damaged sentiment, but potentially supportive from a liquidity perspective. Novogratz views recent Federal Reserve signals and plans to ease bank cash requirements as ‘a monstrous liquidity boom that’s coming,’ with expectations that rates will decline to 2% within 16 months while inflation ‘creeps higher,’ creating negative real rates. For crypto markets, this suggests a complex recovery path: fundamentally weakened by the October events but potentially buoyed by global liquidity conditions once market structure repairs.