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Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO:ETH) falling below key support levels has sparked debate over whether fundamentals are to blame – but Fundstrat’s Tom Lee argues that the real culprit is much more mechanical.
What happened: In an interview with CNBC on Thursday, Lee said crypto has been bleeding since a massive liquidation on Oct. 10 crippled major market makers and left liquidity dangerously tight.
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According to him, a pricing error on one exchange caused a stablecoin to drop internally to $0.65, which in turn triggered a cascade of automatic deleveraging that liquidated nearly two million accounts.
Lee said the so-called “software bug” blew a hole in the balance sheets of market makers, forcing them to reduce their risks, tighten their liquidity and sell into weakness, causing a reflexive, multi-week decline like in 2022.
With liquidity eroded and debt burdens declining, Bitcoin and Ethereum have effectively become leading indicators for broader risk assets, Lee noted, as large funds continue to sit in cash as markets try to stabilize.
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What’s next: Lee expects the breakout to bottom out with Bitcoin around $77,000 and Ethereum around $2,500, arguing that the recovery in previous cycles tends to outpace the decline due to pent-up demand.
He also pointed it out Strategy (NASDAQ:MSTR) as an important sentiment gauge as institutions often hedge large BTC positions by shorting MSTR due to the highly liquid options market.
Historically, once selling pressure from damaged market makers subsides, typically within eight weeks, crypto markets have experienced a sharp recovery.
Despite the volatility, Lee reiterated that Ethereum’s long-term thesis remains solid over the past week.
He recently called ETH the “neutral blockchain with 100% uptime” and argued that it is still undervalued and is quietly gaining relative strength against Bitcoin this year.
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