Earlier this month, a sharp cryptocurrency sell-off exposed how bitcoin market makers can unintentionally magnify price swings during periods of stress.
Summary
From $77,000 to $60,000: why the slide was so violent
Bitcoin plunged from about $77,000 to nearly $60,000 between Feb. 4 and Feb. 7, erasing billions in value across the broader crypto market and wiping out some trading funds. Most commentators blamed macro pressures, spot ETF outflows and rumors of forced liquidations. However, a key structural factor in the derivatives market also appears to have accelerated the move.
That factor was the behavior of options market makers, according to Markus Thielen, founder of 10x Research. These professional liquidity providers usually help stabilize trading by continuously posting buy and sell quotes. Yet their hedging activity can sometimes amplify volatility, especially when positioning is skewed in one direction.
How dealers normally operate in crypto markets
In day-to-day trading, dealers stand on the opposite side of investor orders, quoting both a bid and an ask to keep markets liquid. They earn money from the bid-ask spread, the small difference between the buying and selling price of an asset, rather than by speculating on whether prices will rise or fall. Moreover, this model is designed to keep them as close to market-neutral as possible.
To manage risk, dealers hedge their exposure to price moves by trading the underlying asset, such as Bitcoin, or related derivatives. When investors buy call or put options, the dealers who sell those contracts typically adjust their positions in the spot and futures markets. That said, the speed and direction of this hedging can become destabilizing when large option positions cluster around key price levels.
The short-gamma trap between $60,000 and $75,000
Thielen explains that, during the sell-off, options market makers were heavily short gamma in the $60,000–$75,000 range. In practice, this meant they had sold substantial amounts of options at those strikes without holding enough offsetting hedges. As a result, they were highly sensitive to sharp price moves around those levels.
Being short gamma forces dealers to hedge in the same direction as the market move. As Bitcoin dipped below $75,000, these firms sold BTC in spot and futures to keep their positions near neutral. However, this extra selling added to existing pressure from macro drivers and ETF outflows, helping to deepen the decline.
Thielen estimated there was about $1.5 billion in negative options gamma concentrated between $75,000 and $60,000. He noted this cluster “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.” This description highlights how dealer hedging can both intensify a drop and set the stage for a sharp bounce once positioning clears.
Negative gamma and the self-feeding selling cycle
Negative gamma describes a setup where dealers must trade in the direction of the underlying price move to stay hedged. As Thielen put it, “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 the $60,000–$75,000 window, that dynamic turned them into incremental sellers as prices slid.
In effect, the negative gamma effect created a self-reinforcing loop. As Bitcoin fell, dealers sold more to maintain neutrality, which pushed prices even lower and required further selling. Moreover, this feedback mechanism made the drop feel disorderly, even though it largely stemmed from rule-based risk management rather than discretionary panic.
This pattern is familiar in traditional equity options market makers, where large dealer positions can exacerbate swings once key strikes are breached. The recent episode shows that the same mechanics are increasingly relevant in digital assets. The growing size of the options market means dealer positioning can now influence bitcoin spot behavior in ways that were far less visible a few years ago.
When hedging turns supportive for price
Importantly, dealer hedging does not always push prices lower. In late 2023, market participants saw the opposite effect when similar positioning existed above $36,000. At that time, dealers had sold significant amounts of options at higher strikes and again found themselves short gamma as the market moved.
As Bitcoin’s spot price broke through $36,000, dealers were forced to buy BTC to rebalance their risk. That demand helped fuel a rapid rally toward and above $40,000. However, this shows that the same structural forces that accelerated the February plunge can also power strong upside moves when the direction of travel reverses.
In both episodes, the interplay between investor flows and dealer hedging turned routine market moves into more dramatic swings. The growing influence of options market makers suggests traders and risk managers need to watch positioning data and gamma exposure more closely, particularly around crowded strike levels.
A maturing market with hidden feedback loops
The February breakdown underscores how the bitcoin market makers ecosystem now resembles that of established financial markets, where dealer balance sheets and option structures quietly shape price action. Moreover, the presence of concentrated negative gamma can turn what starts as a macro-driven pullback into a sharp, mechanically amplified move.
For investors, the lesson is that not every violent sell-off or sudden rebound is purely about sentiment or news. Internal market plumbing, especially dealer hedging tied to large option positions, can be just as important in explaining why prices overshoot on the way down and on the way up.
As the crypto derivatives market continues to grow, understanding these dynamics will likely become essential for professional participants. The latest crash toward $60,000 showed how invisible hands in the options arena can transform normal volatility into outsized moves, even when they are simply following risk-management rules.
