October 2025 Sell-Off Exposed Fragile Arbitrage Strategies and Reshaped Market Making
The sharp crypto market crash in October marked a turning point for professional traders, signaling the collapse of the long-standing model of low-risk, high-yield arbitrage. The event wiped out billions in value and fundamentally altered how liquidity providers and market makers operate across digital asset markets.
Between October 10 and 11, the crypto market lost nearly $20 billion in value, triggering what many describe as the most destructive event for sophisticated market makers in recent history. Automated deleveraging systems, designed to protect exchanges during extreme volatility, instead created a feedback loop that dismantled delta-neutral strategies once considered safe.
BitMEX said that the strategy, where traders could arbitrage between the spot and futures markets;
For years, traders relied on funding rate arbitrage, capturing predictable yields by balancing spot holdings with perpetual futures. That strategy has now become overcrowded, with funding rates falling to around 4%, underperforming even conservative Treasury yields.
Liquidity Dries Up Across Exchanges
As forced liquidations closed hedging positions, market makers were left exposed to falling spot prices. This breach of perceived neutrality led to a global withdrawal of liquidity, resulting in the thinnest order books since 2022.
Shift Toward On-Chain Perpetual Trading
The turmoil also accelerated a split in trading venues, while volumes migrated toward high-performance on-chain perpetual platforms. However, recent incidents showed that decentralization alone does not eliminate manipulation risks, especially in illiquid or pre-launch token markets.The October crash underscored a new reality: easy yield in crypto is no longer guaranteed, and market participants must adapt to a more complex, risk-aware trading environment.
Disclaimer
This content is for informational purposes only and does not constitute financial, investment, or legal advice. Cryptocurrency trading involves risk and may result in financial loss.