10.11 big dump and CS2 item market crash eyewitness: Why do the most professional intermediaries always fall first?

Author: San, TechFlow

Reprint: White55, Mars Finance

Among all financial roles, intermediaries are generally regarded as the most stable and least risky presence. In most cases, they do not need to predict direction; they can earn high profits simply by providing liquidity to the market, appearing to be the safest “rent-collecting” position in the market.

However, when a black swan event occurs, these intermediaries are also difficult to escape being crushed by those in higher positions. Ironically, those institutions that are the most professional, have the most abundant funds, and the strictest risk control often suffer greater losses in extreme events than retail investors. This is not because they are not professional enough, but because their business models are destined to bear the cost of systemic risks.

As someone who trades in the cryptocurrency space and also pays attention to the CS2 skin market, I would like to discuss the phenomena I have observed in these two virtual asset trading markets as a firsthand witness to two recent black swan events, as well as the insights that these phenomena have brought.

Two black swan events, the same victims.

On October 11th, when I opened the exchange in the morning, I thought it was a system bug that made me miss out on some altcoins. It wasn't until I refreshed the page repeatedly and realized there was still no change that I sensed something was off. I opened Twitter and discovered that the market had already “exploded.”

In this black swan event, although retail investors have suffered heavy losses, the greater losses may occur in the “intermediary” segment of the cryptocurrency circle.

The losses of intermediaries in the face of extreme market conditions are not a coincidence, but an inevitable manifestation of structural risks.

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 might be even more severe. Wintermute was forced to suspend trading due to risk control violations, while hedge funds like Selini Capital and Cyantarb suffered losses ranging from $18 million to $70 million. These institutions, which usually rely on providing liquidity for stable profits, 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, yet these advantages all become 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, V社 launched a brand new “replacement mechanism” in CS2, allowing players to synthesize knife or glove skins using five rare-level skins. This mechanism instantly changed the existing rarity system, causing some knife skins to plummet from tens of thousands to just a few thousand yuan, while the prices of previously overlooked rare-level skins skyrocketed from around ten yuan to about two hundred yuan. The investment warehouses of many merchants holding high-priced inventory shrank by over 50% in an instant.

Although I don’t have any high-priced CS2 items myself, I have felt the consequences of this crash in many ways. In the third-party item trading market, item merchants quickly took down their purchase orders, leading to a sharp decline in transaction prices. On short video platforms, countless item merchants posted videos lamenting their losses and cursing V社, but more often, there is a sense of 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.

And this seems to reveal a deeper truth: the profit model of intermediaries itself contains the hidden danger of systemic risk.

The dual traps faced by “intermediaries”

The real dilemma faced by intermediaries is that they must hold a large amount of 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 cryptocurrency market, market makers need to provide liquidity simultaneously across multiple exchanges, which requires them to hold a large amount of funds. To enhance capital efficiency, they commonly use leverage of 5 to 20 times. In a normal market, this model works well, with slight fluctuations bringing stable spread profits and leverage amplifying the gains.

But on October 11, this system encountered its biggest “nemesis”: extreme market conditions + exchange downtime.

When extreme market conditions arrive, market makers face massive liquidation of leveraged borrowings, resulting in a flood of liquidation orders pouring into the exchange, causing the system to overload and crash. Even more critically, the exchange crash only cuts off the user's trading interface, while actual liquidations continue to run, leading to the most desperate situation for market makers—watching their positions being liquidated without the ability to add margin.

At 3 a.m. on October 11th, mainstream cryptocurrencies like BTC and ETH experienced a sharp drop, while altcoins plummeted even further, with some directly quoting “zero”. The long positions of market makers triggered forced liquidations → the system automatically sold off → exacerbating market panic → more positions were liquidated → exchanges went down → buyers could not buy in → resulting in greater selling pressure. Once this cycle starts, it cannot be stopped.

Although the CS2 item market does not have leverage and liquidation mechanisms, item traders are facing another structural trap.

When Valve updated the “Replacement Mechanism,” the item merchants had no warning system at all. They excel at analyzing price trends, creating promotional materials for expensive skins, and stirring market sentiment, but this information is meaningless in front of the rule makers.

Exit mechanism failure

In addition to the structural risks exposed by leverage, liquidation, and business models, the exit mechanism is also one of the fundamental reasons for the massive losses incurred by intermediaries. The moment a black swan event occurs is when the market most needs liquidity, and it is also the moment when intermediaries most want to withdraw.

On October 11, when the cryptocurrency market plummeted, market makers held a large number of long positions. To prevent being liquidated, they needed to add margin or close positions. The risk control of these market makers relied on the basic premise of being “tradeable,” but at that time, the servers were unable to process due to a large amount of liquidation data, directly cutting off the market makers' options, leaving them to watch helplessly as their positions were massively liquidated.

In the CS2 skin trading market, transactions rely on the funds injected by numerous skin traders in the market's “buy” list to provide liquidity. After the update is released, retail investors who see the news first immediately sell the skins in their possession to the “buyers”. By the time the skin traders realize something is wrong, they have already incurred significant losses. If they also participate in the selling frenzy, it will further devalue their assets. Ultimately, these skin traders find themselves in a dilemma, becoming the biggest losers of market panic.

The “profit margin” business model is built on “liquidity”, but when systemic risk arises, liquidity can evaporate in an instant - and the intermediaries are precisely those who hold the heaviest positions and need liquidity the most. Even more fatal is that the exit route fails when it is needed the most.

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 a coincidence provides an important insight for retail investors: seemingly robust strategies often contain the greatest risks.

The intermediary strategy can achieve stable small gains most of the time, but faces huge losses during black swan events. This asymmetry in the distribution of returns leads traditional risk metrics to severely underestimate the true risks.

This kind of profit strategy is somewhat like picking up coins on a railway track; you can safely pick up money 99% of the time, but when a train comes, there's no time to run away 1% of the time.

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 from systemic risk. When the market experiences extreme conditions, any risk control model may fail.

Moreover, investors need to be aware of the importance of “platform risk.” Whether it is changes in exchange rules or adjustments in game developers' mechanisms, these can instantly alter market volatility. This risk cannot be completely 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 reference. The first is to reduce reliance on the “exit mechanism,” especially for high-leverage contract players. In the face of such short-term price crashes, it is very likely that even if there are funds available to supplement margin, they may not be able to do so in time or may not be able to supplement at all.

There is no safe position, only reasonable risk compensation.

$19 billion in liquidations, high-priced jewelry plummeted by 70%. This money hasn't disappeared; it has simply shifted from the hands of those “making a profit” to those “holding core resources.”

In the face of a black swan, those who do not possess core resources can become victims, whether they are retail investors or institutions. Institutions suffer greater losses because of their larger stakes; retail investors face worse losses because they have no backup plan. But in fact, everyone is betting on the same thing: that the system will not collapse in their hands.

You think you are making a profit from the price difference, but in fact, you are paying for systemic risk, and when the risk comes, you won't even have the right to choose.