Author: Umbrella, Deep Tide TechFlow

Of all financial roles, middlemen are generally considered the most stable and least risky. Most of the time, they don't need to predict market trends; simply providing liquidity can generate high profits, making them the safest "rent-collecting" position in the market.

However, when black swan events strike, these intermediaries are inevitably crushed by those in higher positions. Ironically, the most professional institutions, those with the best capital and the most stringent risk controls, often suffer greater losses than retail investors in extreme events. This isn't because they lack professionalism, but because their business models are destined to pay the price for systemic risk.

As someone who trades in the cryptocurrency world and also follows the CS2 jewelry market, and who has witnessed two recent black swan events, I would like to talk about the phenomena I discovered in these two virtual asset trading markets and the implications behind these phenomena.

Two black swans, same victim

On the morning of October 11, when I opened the exchange, I thought it was a system bug that had underestimated some altcoins. It wasn’t until I refreshed the account again and again and saw no changes that I realized something was wrong. I opened Twitter and found that the market had "exploded."

In this black swan event, although retail investors suffered heavy losses, even greater losses may have occurred among the "middlemen" in the cryptocurrency circle.

The losses suffered by middlemen when faced with extreme market conditions are not accidental, but an inevitable manifestation of structural risks.

On October 11th, Trump announced a 100% tariff on Chinese goods, triggering the largest liquidation event in the crypto market's history. Beyond the $19 billion to $19.4 billion in liquidations, market makers suffered even more devastating losses. 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 normally profited from providing liquidity, lost months or even years of accumulated profits in just 12 hours.

The most advanced quantitative models, the most comprehensive risk management systems, and the most informed market intelligence—all these advantages are rendered useless by the Black Swan. If even they can't escape, what chance do retail investors have?

Twelve days later, a nearly identical scenario unfolded in another virtual world. On October 23rd, Valve launched a new "trading mechanic" in CS2, allowing players to combine skins from five different rarity levels into a single blade or glove skin. This mechanic instantly altered the rarity system, causing some knife skins to plummet from tens of thousands of yuan to a few thousand, while previously unnoticed rare skins soared from a dozen yuan to around two hundred yuan. The investment warehouses of numerous accessory merchants holding high-priced inventory suddenly shrank by over 50%.

Although I don't have any high-priced CS2 accessories myself, I have felt the consequences of this plunge in many aspects. Accessory merchants in the third-party accessory trading market quickly removed purchase orders, causing transaction prices to plummet. Short video platforms were flooded with accessories merchants posting videos complaining about losses and cursing Valve, but more of them were at a loss and at a loss in the face of this sudden incident.

Two seemingly unrelated markets show surprising similarities: crypto market makers and CS2 accessories merchants. One faces Trump's tariff policy, and the other faces Valve's rule adjustments, but their deaths are almost exactly the same.

This also seems to reveal a deeper truth: the profit model of middlemen itself contains hidden dangers of systemic risks.

The double trap faced by “middlemen”

The real dilemma facing middlemen 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

Market makers' profit model necessitates the use of leverage. In the crypto market, market makers need to provide liquidity across multiple exchanges simultaneously, which requires them to hold large amounts of capital. To maximize capital efficiency, they typically use 5-20x leverage. In normal markets, this model works well, generating stable spread returns despite small fluctuations, and leverage amplifies profits.

But on October 11, this system encountered its biggest "natural enemy": extreme market conditions + exchange downtime.

When extreme market conditions strike, market makers' leveraged positions are liquidated, and a flood of liquidation orders floods the exchange, causing system overload and downtime. Even more devastating, the exchange outage only disconnects the user's trading interface; actual liquidation continues, leaving market makers in a desperate situation: watching their positions liquidated without being able to add margin.

At 3:00 AM on October 11th, mainstream cryptocurrencies like BTC and ETH plummeted, while some altcoins plummeted to zero. Market makers' long positions triggered forced liquidations, which led to automated sell-offs, exacerbating market panic. More positions were liquidated, exchanges crashed, buyers were unable to access the market, and selling pressure intensified. Once this cycle started, it became unstoppable.

Although the CS2 jewelry market has no leverage and liquidation mechanism, jewelry merchants face another structural trap.

When Valve updated its "replacement" mechanism, accessory vendors had no warning mechanism at all. They were good at analyzing price trends, creating promotional materials for expensive skins, and stirring up market sentiment, but this information was meaningless in front of the rule makers.

Exit mechanism fails

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 huge losses of "middlemen". The moment when a black swan event occurs is when the market needs liquidity the most, and it is also the moment when middlemen most want to withdraw.

When the crypto market plummeted on October 11, market makers held a large number of long positions. In order to prevent liquidation, they needed to add margin or close their 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 the large amount of liquidation data, which directly cut off the market makers' plans, causing them to watch their positions being liquidated in large quantities.

In CS2's accessory trading market, trading relies on liquidity provided by a large number of accessory merchants who place their skins on the "wanted" list. When an update is released, retail investors who see the news immediately sell their skins to the "wanted" list. By the time accessory merchants realize something is amiss, they've already incurred significant losses. If they also join the sell-off, their assets will further depreciate. Ultimately, these accessory merchants are caught in a dilemma, becoming the biggest losers in the market panic.

The "profiting from price differences" business model is built on liquidity, but when systemic risk strikes, liquidity can evaporate in an instant—and middlemen are precisely those holding the heaviest positions and most in need of liquidity. Even more devastating is that exit routes fail when they are most needed.

Lessons for retail investors

In just two weeks, two popular virtual asset trading markets experienced the largest black swan events in their respective industry history. This coincidence provides an important revelation for retail investors: seemingly stable strategies often contain the greatest risks.

Intermediary strategies can generate stable, small returns most of the time, but face significant losses in black swan events. This asymmetric return distribution causes traditional risk metrics to seriously underestimate the true risk.

This kind of profit strategy is a bit like picking up coins on the railroad tracks. 99% of the time you can pick up the money safely, but 1% of the time the train is rushing by and you have no time to escape.

From a portfolio construction perspective, investors who overly rely on intermediary strategies need to reassess their risk exposure. The losses suffered by crypto market makers in black swan events demonstrate that even market-neutral strategies cannot completely isolate systemic risk. When market conditions are extreme, any risk control model may fail.

More importantly, investors need to be aware of the importance of "platform risk." Whether it's a rule change at an exchange or a mechanism adjustment by a game developer, market volatility can change in an instant. This risk cannot be completely avoided through diversification or hedging strategies, but can only be managed by reducing leverage and maintaining a sufficient liquidity buffer.

For retail investors, these events also offer some valuable self-protection strategies. The first is to reduce reliance on "exit mechanisms," especially for those holding highly leveraged contracts. In the face of such a short-term market crash, even if they have the funds to cover margin, it may be too late or impossible to do so.

There is no safe position, only reasonable risk compensation

A $19 billion margin call sent high-priced jewelry prices plummeting 70%. The money didn't disappear; it simply shifted from those profiting from the price difference to those who controlled the core resources.

In the face of a black swan event, anyone without access to core resources can be a victim, whether retail investors or institutions. Institutions suffer greater losses due to their large trading volumes; retail investors suffer even greater losses due to their lack of backup plans. But everyone is essentially betting on the same thing: the system won't collapse under their control.

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