Bitcoin plunged early this month to nearly $60,000, wiping out large chunks of value across the crypto market and vaporizing some trading funds.
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 major role in crashing the spot price lower.
That force is the market makers, or dealers, who continuously post buy and sell orders in the order book when you trade, keeping liquidity strong so trades happen smoothly without significant delays or price jumps. They are always on the opposite end of investors’ trades and make money from the bid-ask spread, the small gap between the buy price (bid) and the sell price (ask) of an asset, without gambling 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 Feb. 4 and Feb. 7 as 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 swaying 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 these levels without enough hedges or protective bets. This left them vulnerable to price volatility around these levels.
As bitcoin fell below $75,000, these market makers sold BTC in the spot or futures markets to rebalance their hedges and stay price-neutral, injecting extra selling pressure in the market.
“The presence of approximately $1.5 billion in negative options gamma between $75,000 and $60,000 played a critical role in accelerating Bitcoin’s decline and helps explain why the market rebounded sharply once the final large gamma cluster near $60,000 was triggered and absorbed,” Thielen said in a note to clients Friday.
“Negative gamma means that options dealers, who are typically the counterparties to investors buying options, are forced to hedge in the same direction as the underlying price move. In this case, as Bitcoin declined to the $60,000–$75,000 range, dealers became increasingly short gamma, which required them to sell bitcoin as prices fell to remain hedged,” he explained.
In other words, hedging by market makers established a self-feeding cycle of falling prices, forcing dealers to sell more, which further pushed prices lower.
Note that market makers’ hedging isn’t always bearish. In late 2023, they were similarly short options above $36,000. As Bitcoin’s spot price rose past that level, they bought BTC to rebalance, sparking a rapid rally above $40,000.
