Experiencing the Black Swan event on October 11 and the CS2 crash: I discovered the death trap of intermediaries.

Author: San, Deep Tide TechFlow

Among all financial roles, intermediaries are generally considered to be the most stable and least risky presence. In most cases, they do not need to predict direction; they can earn substantial profits simply by providing liquidity to the market, seemingly the safest “rental” position in the market.

However, when a black swan event occurs, this group of intermediaries also finds it difficult 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 because they are not professional enough, but because their business models are destined to pay for systemic risks.

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

Two Black Swans, the Same Victims

On October 11th, when I opened the exchange in the morning, I thought it was a system bug that had miscalculated some altcoins for me. It wasn't until I refreshed multiple times and still saw no change that I realized something was off. I opened Twitter and found out that the market had already “exploded.”

In this black swan event, while retail investors suffered heavy losses, even greater losses may occur in the “intermediary” segment of the cryptocurrency market.

The losses of intermediaries in the face of extreme market conditions are not偶然现象, but rather an inevitable reflection of structural risks.

On October 11, Trump announced a 100% tariff on Chinese goods, triggering the largest liquidation event in the history of the crypto market. Beyond the liquidation amount of $19 to $19.4 billion, the losses for market makers may be even more severe. Wintermute was forced to halt trading due to a breach of risk control, and hedge funds like Selini Capital and Cyantarb suffered losses ranging from $18 million to $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 up-to-date market information, yet all these advantages 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 a nearly identical script. On October 23, Valve launched a brand new “replacement mechanism” in CS2, allowing players to synthesize knife or glove skins using 5 rare-grade skins. This mechanism instantly changed the existing rarity system, causing some knife skins to drop from tens of thousands to a few thousand yuan, while previously unnoticed rare-grade skins surged in price from a dozen yuan to around two hundred yuan. The investment warehouses of many traders holding high-priced inventory instantly shrank by more than 50%.

Although I don't have any high-priced CS2 items myself, I have felt the consequences of this crash in multiple ways. The rapid removal of purchase orders by item traders in the third-party item trading market has led to a sharp drop in transaction prices. On short video platforms, countless item traders post videos lamenting their losses and cursing V社, but more often, they are faced with confusion and helplessness in the face of this sudden event.

Two seemingly unrelated markets exhibit astonishing similarities: cryptocurrency market makers and CS2 skin traders. One faces Trump's tariff policies, while the other contends with 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 Double Trap 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 reveals fatal weaknesses.

Leverage and Liquidation

The profit model of market makers determines that they must use leverage. In the cryptocurrency market, market makers need to provide liquidity on multiple exchanges simultaneously, which requires them to hold a large amount of capital. To improve capital efficiency, they generally use leverage of 5 to 20 times. In normal markets, this model works well, with slight fluctuations bringing stable spread profits, and leverage magnifying profits.

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

When extreme market conditions arise, market makers face massive liquidations due to leveraged borrowing, resulting in a flood of liquidation orders pouring into exchanges, causing system overload and downtime. More critically, the exchange downtime only disconnects the user's trading interface, while actual liquidations continue to run, leading to the most desperate scenario for market makers—watching their positions being liquidated without the ability to add margin.

At 3 a.m. on October 11, mainstream cryptocurrencies like BTC and ETH experienced a sharp decline, while altcoins even quoted “zero” directly. The long positions of market makers triggered forced liquidation → the system automatically sold off → exacerbating market panic → more positions were liquidated → exchanges went down → buyers couldn't buy in → greater selling pressure. Once this cycle starts, it cannot be stopped.

Although the CS2 skin market does not have leverage and liquidation mechanisms, the skin traders face 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 malfunction

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 suffered by “intermediaries.” The moment when a black swan event occurs is precisely when the market needs liquidity the most, 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 their positions. The risk control of these market makers relied on the basic premise of being “tradeable,” but at that time, due to a large amount of liquidation data, the servers were unable to process, which directly cut off the market makers' options, leaving them to watch helplessly as their positions were heavily liquidated.

In the CS2 item trading market, transactions rely on the funds injected by a large number of item traders into the market's “buy” list to provide liquidity. After the update is released, retail investors who see the news first immediately sell their skins to the “buyers.” By the time the item 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 item traders find themselves in a dilemma, becoming the biggest losers in the market panic.

The “arbitrage” business model is built on “liquidity”, but when systemic risks arise, liquidity can evaporate in an instant—while intermediaries are precisely the ones holding the most positions and needing liquidity the most. What is even more fatal is that the exit routes fail to function when they are 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 this coincidence provides an important insight for retail investors: seemingly robust strategies often contain the greatest risks.

The intermediary strategy can achieve stable small profits most of the time, but faces huge losses during black swan events. This asymmetry in profit distribution causes traditional risk measurement indicators to severely underestimate its true risk.

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

From the perspective of portfolio construction, investors who overly rely on intermediary strategies need to reassess their risk exposure. The losses of market makers in the cryptocurrency market during black swan events illustrate that even market-neutral strategies cannot completely isolate systemic risk. When the market experiences extreme conditions, any risk control model may fail.

More importantly, investors need to be aware of the significance of “platform risk.” Whether it's changes in the exchange's rules or adjustments in the game developer's 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 refer to. The first is to reduce reliance on the “exit mechanism,” especially for players in high-leverage contracts. In the face of such short-term crashes, it is very likely that even with funds to replenish the margin, they may not be able to do so in time or at all.

There is no safe position, only reasonable risk compensation

$19 billion in liquidations, high-priced jewelry plummeting by 70%. This money hasn't disappeared; it has simply transferred from the hands of those who 'make the price difference' to those who 'hold the core resources'.

In the face of a black swan, those who do not hold core resources can all be victims, whether they are retail investors or institutions. Institutions incur greater losses because of their larger positions; retail investors suffer even more because they lack backup plans. 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 risks, and when the risks come, you won't even have the right to choose.