Crypto Meltdown: Market Cap Sheds $325B—Is Liquidity Crisis to Blame?

• Analysts attribute the crypto market crash to factors including Solana’s downturn, liquidity concerns, and the Bybit hack—the largest crypto theft in history.
• Solana’s 22% drop since Friday and the $1.5 billion Bybit hack have undermined investor confidence.

The crypto market is in the midst of a deep decline, with more than $325 billion of market capitalization lost since last Friday morning. One particularly dramatic drop was experienced on Monday when $100 billion was lost in just one hour, with no prominent headlines sparking the sell-off.

This surprise implosion has had analysts and traders searching for explanations. The financial newsletter, ‘The Kobeissi Letter,’ attributed the confluence of factors, varying from Solana’s weakness to wider liquidity issues and the Bybit hack, now referred to as the “largest financial heist in history.”

Solana, Citadel & Bybit Hack’s Role In The Crash

Much of the chaos does appear to have come from Solana, which has fallen 22% since Friday, as mentioned in our previous news article. Solana was riding high through the “memecoin hype,” but as that momentum dwindled, so did its value.

“For a while, selling in Solana was largely isolated from Bitcoin,” The Kobeissi Letter added. But before long, Bitcoin was following in its footsteps, with the S&P 500 starting to lose ground on Friday.

The loss by Bitcoin speeded up yet again on Monday, breaching the crucial support of $98,000, as indicated in our previous discussion. That weakness in the world’s top crypto contributed further to the generalized pressure of sale across the sector. 

Adding to the intrigue, Monday’s crypto meltdown came on the heels of a big announcement from Citadel Securities, the $65 billion financial behemoth. Bloomberg said Citadel is seeking to become a liquidity provider for Bitcoin and the overall crypto space. However, instead of instilling confidence, the news prompted a steep sell-off. “Markets took this as a ‘sell the news’ event,” The Kobeissi Letter noted.

Aside from technical reasons, hacks and security issues have also shaken investors. On Friday, February 21, crypto exchange Bybit experienced a huge security breach, with analysts referring to it as the largest financial heist in history. The crypto exchange experienced a security breach of nearly $1.5 billion, shaking the entire market.

The Bybit hack more than doubled the record for the largest crypto hack previously held by the $611 million PolyNetwork breach in 2021, according to Arkham Intelligence. Such hacks have a devastating impact on market confidence, especially for Ethereum, which also suffered deep plunges.

Liquidity Woes & Market Outlook

Crypto markets are highly reliant on liquidity, and recent developments indicate that liquidity is evaporating quickly. “As volatility returns to equity markets, risky assets like Bitcoin are pulling back,” The Kobeissi Letter wrote.

Following months of unprecedented risk-taking in the crypto space, a pullback in risk appetite has resulted in lower liquidity. This does not necessarily translate into a long bear market, though. Bitcoin has experienced multiple 10% pullbacks in this cycle, which are viewed as healthy corrections and not an indication of an incoming collapse.