Author: San, Deep Tide TechFlow
Among all financial roles, intermediaries are generally considered the most stable and least risky entities. In most cases, they do not need to predict market direction; they can earn substantial profits simply by providing liquidity, seemingly occupying the safest "rental" position in the market.
However, when a black swan event occurs, these intermediaries are also unable to escape being crushed by those in higher positions. Ironically, the most professional, well-funded, and tightly controlled institutions often suffer greater losses during extreme events than retail investors. This is not due to a lack of professionalism but because their business model is destined to bear the cost of systemic risk.
As someone who trades in the crypto space and also pays attention to the CS2 skin market, I want to discuss the phenomena I observed in these two virtual asset trading markets as a firsthand witness to two recent black swan events and the insights these phenomena bring.
Two Black Swans, the Same Victims
On October 11, when I opened the exchange in the morning, I thought there was a system bug that caused my account to miscalculate some altcoins. It wasn't until I refreshed the page multiple times and saw no change that I realized something was wrong. Upon checking Twitter, I discovered that the market had "exploded."
In this black swan event, although retail investors suffered heavy losses, the greater losses likely occurred in the "intermediary" segment of the crypto space.
The losses faced by intermediaries during extreme market conditions are not coincidental; they are an inevitable manifestation of structural risk.
On October 11, Trump announced a 100% tariff on Chinese goods, triggering the largest liquidation event in crypto market history. Beyond the liquidation amount of $19 to $19.4 billion, the losses for market makers may have been even more severe. Wintermute was forced to suspend trading due to risk control violations, while hedge funds like Selini Capital and Cyantarb lost between $18 million and $70 million. These institutions, which typically earn stable profits by providing liquidity, lost months or even years of accumulated earnings within 12 hours.
The most advanced quantitative models, the most comprehensive risk systems, and the most timely market information—all these advantages became ineffective in the face of a black swan. If even they cannot escape, what chance do retail investors have?
Twelve days later, another virtual world experienced an almost identical script. On October 23, Valve introduced a new "replacement mechanism" in CS2, allowing players to combine five rare-level skins into knife or glove skins. This mechanism instantly altered the existing rarity system, causing some knife skins to plummet from tens of thousands to just a few thousand yuan, while previously overlooked rare-level skins skyrocketed from a few yuan to around two hundred yuan. Many traders holding high-priced inventory saw their investment portfolios shrink by over 50% in an instant.
Although I personally do not own any high-priced CS2 skins, I felt the consequences of this crash in various ways. The rapid removal of purchase orders by third-party skin traders led to a plummet in transaction prices, and countless traders flooded short video platforms with videos lamenting their losses and cursing Valve, but more often, they expressed confusion and helplessness in the face of this sudden event.
Two seemingly unrelated markets exhibit astonishing similarities: crypto market makers and CS2 skin traders, one facing Trump's tariff policy and the other facing Valve's rule adjustments, yet their demise is almost identical.
This also seems to reveal a deeper truth: the profit model of intermediaries inherently contains the hidden danger of systemic risk.
The Dual Traps Facing "Intermediaries"
The real dilemma for intermediaries is that they must hold a large inventory to provide liquidity, but in the face of extreme market conditions, their business model exposes fatal weaknesses.
Leverage and Liquidation
The profit model of market makers dictates that they must use leverage. In the crypto market, market makers need to provide liquidity across multiple exchanges simultaneously, which requires them to hold substantial funds. To enhance capital efficiency, they commonly use 5-20 times leverage. In normal market conditions, this model operates well, with slight fluctuations yielding stable spread profits, and leverage amplifying gains.
However, on October 11, this system encountered its greatest "nemesis": extreme market conditions + exchange outages.
When extreme conditions arise, market makers' extensive leveraged positions get liquidated, and a massive influx of liquidation orders overwhelms the exchanges, causing system overload and outages. More critically, the exchange outage merely cuts off users' trading interfaces, while actual liquidations continue to run, leading to the most desperate scenario for market makers—watching their positions get liquidated without the ability to add margin.
At 3 AM on October 11, mainstream cryptocurrencies like BTC and ETH briefly plummeted, while some altcoins even quoted "zero." Market makers' long positions triggered forced liquidations → the system automatically sold off → market panic intensified → more positions were liquidated → exchanges went down → buy orders could not be executed → further selling pressure. Once this cycle starts, it cannot be stopped.
While the CS2 skin market lacks leverage and liquidation mechanisms, skin traders face another structural trap.
When Valve updated the "replacement mechanism," skin traders had no warning mechanism whatsoever. They excel at analyzing price trends, creating promotional materials for expensive skins, and stirring market sentiment, but this information is meaningless in front of rule-makers.
Exit Mechanism Failure
In addition to leverage and liquidation, as well as the structural risks exposed by their business model, the failure of the exit mechanism is also one of the fundamental reasons for the massive losses faced by intermediaries. The moment a black swan event strikes is precisely when the market needs liquidity the most, yet it is also when intermediaries most want to exit.
During the crypto market crash on October 11, market makers held substantial long positions. To avoid liquidation, they needed to add margin or close positions. The risk control of these market makers relied on the basic premise of "being able to trade," but at that time, the server was unable to process due to the overwhelming liquidation data, effectively cutting off their options, leaving them helplessly watching their positions get liquidated.
In the CS2 skin trading market, transactions rely on the funds injected by numerous skin traders into the market's "buy" list to provide liquidity. After the update was released, retail investors who saw the news first rushed to sell their skins to "buy orders." By the time skin traders realized something was wrong, they had already incurred significant losses. If they also joined the selling frenzy, it would further devalue their assets. Ultimately, these skin traders found themselves in a dilemma, becoming the biggest losers in the market panic.
The "profit margin" business model is built on "liquidity," but when systemic risk strikes, liquidity can evaporate in an instant—yet intermediaries are precisely those who hold the heaviest positions and need liquidity the most. More critically, the exit routes fail precisely when they are most needed.
Insights for Retail Investors
In just two weeks, two popular virtual asset trading markets experienced the largest black swan events in their respective industries, and such coincidences provide an important insight for retail investors: seemingly robust strategies often harbor the greatest risks.
Intermediary strategies can yield stable small profits most of the time, but they face enormous losses during black swan events. This asymmetry in profit distribution leads traditional risk measurement indicators to severely underestimate their true risk.
Such profit strategies resemble picking up coins on a railway track; for 99% of the time, one can safely collect money, but during the 1% of the time when a train comes, there is simply no time to run.
From the perspective of portfolio construction, investors who overly rely on intermediary strategies need to reassess their risk exposure. The losses of crypto market makers during black swan events indicate that even market-neutral strategies cannot completely isolate systemic risk. When extreme market conditions arise, any risk control model may fail.
More importantly, investors need to recognize the significance of "platform risk." Whether it is changes in exchange rules or adjustments in game developers' mechanisms, these can instantaneously alter market volatility. This risk cannot be entirely avoided through diversification or hedging strategies; it can only be managed by reducing leverage and maintaining sufficient liquidity buffers.
For retail investors, these events also provide some self-protection strategies to consider. First, reduce reliance on "exit mechanisms," especially for high-leverage contract players. In the face of such short-term crashes, it is very likely that even if they have funds to add margin, they may not be able to do so in time.
There is No Safe Position, Only Reasonable Risk Compensation
$19 billion in liquidations, high-priced skins plummeting by 70%. This money has not disappeared; it has merely shifted from the hands of those "earning the spread" to those "holding core resources."
In the face of a black swan, those who do not hold core resources can all be victims, whether retail investors or institutions. Institutions lose more because they have larger positions; retail investors suffer more because they lack backup plans. But in reality, everyone is betting on the same thing: the system will not collapse in their hands.
You may think you are earning the spread, but in fact, you are paying for systemic risk, and when the risk arrives, you may not even have the right to choose.
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