‘Wake-up call’: After $500 billion crypto crash, analysts warn market reset exposes leverage risks
With traditional markets closed for the weekend, crypto traders witnessed a massive selloff on Friday evening. After U.S. President Donald Trump confirmed he would impose a 100% tariff on imports from China, more than half a trillion dollars had been wiped out, with the total crypto market falling over 10%.
Crypto liquidations quickly hit $10 billion and neared $20 billion later that evening, and many estimate the full data could be as much as four times that amount. One trader said Friday's drawdown was, in dollar terms, the largest liquidation event in crypto history. Markets began to stabilize over the weekend, though some say the drop was a reminder that, as the crypto market matures, the risks are amplified.
"The arrival of spot crypto ETFs and institutional interest has lulled investors into a false sense of security, but it remains the only market that trades after hours," said Nic Puckrin, crypto analyst and co-founder of The Coin Bureau. "In this environment, thin liquidity, overleverage, and the involvement of big players make for a toxic cocktail."
The biggest shock, according to Puckrin, was that traders were forced out of even profitable positions due to auto-deleveraging (ADL) on exchanges. ADL is a risk management mechanism that certainly deserves some scrutiny as exchanges conduct reviews of this mass liquidation event. "At the very least, traders must be more aware of this risk before committing to leveraged or long/short trades," the analyst said.
Lucas Kiely, CEO and founder of digital asset wealth manager Future Digital Capital Management, noted that the mass liquidation event revealed the extent of the leverage in the market.
"Forecasting the market's movements during a flash crash like this is about as effective as reading tea leaves to predict one's fortune. When volatility spikes the way it did on Friday, the best investment approach is a defensive one," Kiely said. "With whales now controlling so much crypto liquidity, the risk of mass liquidation events has increased. This sell-off is a wake-up call for traders that high leverage is a very dangerous game in a market this illiquid and this close to a cycle top."
The scale of the liquidations suggests potential involvement of larger institutional players or market makers whose sizable positions may have amplified the cascade effect, according to The Block Research.
"When long positions are forcibly closed, they effectively become market sell orders, creating additional downward pressure on prices. This is particularly pronounced in crypto markets due to relatively thinner liquidity compared to traditional assets," the team wrote in its weekly newsletter. "As prices decline and trigger more liquidations, each wave of forced selling pushes prices lower, triggering subsequent liquidation thresholds in a self-reinforcing cycle unique to leveraged crypto trading."
Moving forward
After nearly falling under the $100,000 level, the price of bitcoin is sitting around $114,400 while Ethereum is back up to around $4,100 according to The Block's price data. Several altcoins are also trading higher over the past 24 hours, nearly recovering their losses from Friday evening.
The Fear & Greed Index, which measures crypto market sentiment on a scale from 0 (Extreme Fear) to 100 (Extreme Greed) with a focus on Bitcoin, dropped to its lowest level since April, which may indicate a buying opportunity, as opposed to a higher value that suggests a potential market correction. Analysts remain optimistic in the near and medium term.
"The good news is that this has cleaned out the excessive leverage and reset the risk in the market, for now," Puckrin said. "However, Bitcoin now faces another uphill battle to break past key resistance levels that will allow it to reach a meaningful new all-time high this year."
The market may continue to experience downward pressure and volatility as it digests these geopolitical risks alongside new tariffs, said Kevin Lee, chief business officer of Gate, but the Federal Reserve’s scheduled rate cut at the end of October is a critical mitigating factor.
"This dovish monetary shift, coupled with sustained institutional inflows and on-chain supply tightening, supports a cautiously optimistic view for crypto's mid to long-term fundamentals," Lee said. "Despite the turbulence, crypto's role as an inflation hedge and alternative asset class grows more relevant amid elevated global uncertainties."
Investors should anticipate ongoing short-term swings until after the Fed’s Oct. 28-29 meeting, according to Lee.
Jeremy Siegel, professor emeritus of finance at the Wharton School of Business and WisdomTree chief economist, claims crypto still isn't a good diversifier when it comes to geopolitical and trade risks.
"Gold held up, treasuries actually went up. If you're into a short-run diversifier to risk, bitcoin has a lot of positive features about it," Siegel said Monday on CNBC. "It will snap back, but for people who are thinking about what's good to diversify for short-term risk, bitcoin still is not there."
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