Crypto’s biggest crash reveals a market littered with pitfalls

For a few manic hours on Friday, the world of digital assets - billed by proponents as the future of finance - replayed Wall Street’s oldest reflex at machine speed during market stress: a stampede for the exits.

The spark was familiar but unexpected. Donald Trump’s 100% tariff threat on Chinese imports rattled global markets bloated with speculative excess. But the pain was most acute in crypto, with an index tracking altcoins - the smaller tokens beyond Bitcoin and Ether that rely on fragile liquidity and speculative zeal – dropping as much as 40% within minutes.

While the crash was brief and prices have since partially recovered, critics point to underlying issues in the crypto market’s structure that makes it prone to violent selloffs. From a chronic lack of liquidity during weekend trading and excessive leverage to how major exchanges handle and report liquidations, these problems continue to dog a sector that’s gained increased mass-market appeal since Trump returned to power.

“During this crash, depth evaporated and liquidation engines got overwhelmed,” said Justin d’Anethan, the head of partnerships at Arctic Digital, a boutique advisory firm focused on private markets in crypto. Auto-deleveraging control mechanisms at exchanges “poured gasoline on the fire” and “it felt less like a market and more like a trap snapping shut.”

As recriminations flew, market observers zeroed in on Binance, the dominant crypto exchange, and Hyperliquid, a fast-growing decentralized-finance platform. More than $10 billion of leveraged bets were liquidated on Hyperliquid, and another $2.4 billion on Binance, according to Coinglass, which compiles such data.

Coinglass estimated that a total $19 billion worth of positions were wiped out across trading venues. It added that “the actual total is likely much higher” since Binance only reports one liquidation order per second.

A technical glitch on Binance exacerbated the selloff, and the exchange later said it paid $283 million in compensation to affected users. It said the glitch didn’t cause the market crash.

Binance and Hyperliquid didn’t immediately respond to requests for comment. “Hyperliquid is a blockchain where every order, trade, and liquidation happens onchain,” Jeff Yan, the platform’s co-founder, said in an X post on Monday. “Anyone can permissionlessly verify the chain’s execution, including all liquidations and their fair execution for all users.”

For an industry that spent the past three years trying to restore confidence following the catastrophic collapse of exchange FTX, Friday was an ugly reminder of how tenuous those gains are.

Leverage Buildup

At one point, $7 billion vanished in a single hour, Coinglass data show. From Singapore to New York, one lesson echoed: When crypto algorithms seize control, there’s no human left to intervene. Thin and fragmented liquidity on the weekend made it worse.

In digital assets, margin calls are not requests but automatic commands. When collateral falters, algorithms sell without pause. No time, no mercy. The same plumbing that keeps markets open 24 hours a day also ensures that when volatility strikes, losses cascade at a rapid clip.

Leverage had been quietly building for months. Hedge funds, retail traders and market-makers had shifted from holding tokens outright to using borrowed money to amplify returns. On the surface, risk appeared contained: positions seemed offset, funding rates calm. In truth, many trades were backed by the same pool of collateral, leaving the system fragile. When that collateral cracked, everything tied to it fell in unison.

In theory, crypto exchanges have a backstop. Each typically maintains an insurance fund - a pool of capital built from liquidation fees and trading penalties, designed to absorb losses when clients’ margin runs out. When a leveraged trader’s position collapses faster than it can be sold, the fund steps in to buy it, covering the shortfall so the market stays orderly. On calm days, these pools quietly earn money. In panic, they are the only thing standing between volatility and insolvency.

On Friday, they broke. As liquidations accelerated, losses outpaced the funds’ capacity to absorb them. That triggered the system’s final line of defence: auto-deleveraging.

While geopolitics was the trigger for the rout, “what really kicked the market is that Binance and some other exchanges, they started auto-deleveraging,” said Re7 Capital founder Evgeny Gokhberg. “It’s the worst flush in the history of crypto, and to a very large extent it was exacerbated by centralized exchanges changing their ADL parameters.”

No Safety Nets

The massive unwinding of leverages spilled over to altcoins, which were eviscerated. Traditional markets have circuit breakers, clearing houses and moments to breathe. Crypto has none. Once liquidations hit, algos sell into whatever liquidity remains. When most traders are posting the same coins as security, the loop is self-reinforcing: Forced selling drives prices lower, triggering yet more forced selling. Within minutes, liquidity can disappear entirely.

“When massive long liquidations occur simultaneously without new willing counterparties, the system faces mathematical impossibility,” market maker Caladan said in a research note. “There aren’t enough losers to pay all the winners.”

The timing is awkward. The market’s collapse comes just as crypto is edging closer to mainstream legitimacy with Wall Street firms expanding digital-asset offerings, while retail traders plunge in. In Washington, a months-long push for a market-structure bill signals the clearest path yet toward regulatory recognition.

In traditional finance, it recalls the 2008 credit unwind and the 2020 Treasury squeeze - small shocks meeting hidden leverage and brittle liquidity - only in crypto the sequence can unfold in minutes, not days. Mainstream markets have buffers: brokers, settlement delays, central banks, while crypto relies on momentum.

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