I finally found time to sort out the logic behind last month’s big crash. It took me several days, mainly because I wanted to read more analyses from different sources, including JPMorgan’s report and some in-depth articles online.

Let’s look at an interesting phenomenon first: from late October to late November last year, the S&P 500, A-shares (SSE and CSI 300), and the Nikkei Index all dropped almost simultaneously, with declines ranging from 5% to 8%. Bitcoin took an even bigger hit, plunging nearly 30% at its lowest point. Digging deeper, you’ll find that this kind of cross-market, cross-asset class collective slump may all trace back to one place—the US repo market ran into trouble.

BTC’s dramatic drop wasn’t just due to its inherent high volatility; you also have to consider the chain reaction among market makers. Do you remember the liquidation storm on October 11? The major market makers, often called the “invisible central banks” of crypto, were completely blindsided. Their hedging models failed instantly, and suddenly there was a huge hole in their balance sheets.

To survive, these market makers had no choice but to frantically pull back liquidity. The result? Order book depth collapsed, and at the worst point, liquidity evaporated by 98%—yes, 98%. This wasn’t the Fed doing quantitative tightening; it was purely a survival reaction by market participants. Tom Lee estimated that top market makers lost about $19 to $20 billion that day. According to him, it would take at least 6 to 8 weeks to fully recover.

Quick explainer: The SOFR indicator can be simply understood as the average overnight repo rate when you use US Treasuries as collateral. The logic chain is straightforward—when there’s a liquidity crunch in the repo market, repo rates spike, and SOFR naturally goes up.

How big of an impact does the repo market have on the entire US financial system?