{"id":232348,"date":"2025-10-17T21:17:09","date_gmt":"2025-10-17T21:17:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/232348\/"},"modified":"2025-10-17T21:17:09","modified_gmt":"2025-10-17T21:17:09","slug":"anatomy-of-a-crypto-meltdown","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/232348\/","title":{"rendered":"Anatomy of a crypto meltdown"},"content":{"rendered":"

At 4:50\u00a0pm on October\u00a010, when traditional markets were closed, Donald Trump launched a new salvo in the simmering US\u2013China trade war. Likely referring to China\u2019s dramatically expanded restrictions on the rare earth minerals it almost singlehandedly controls, Trump posted that he would retaliate with an imminent 100% tariff increase on the country and new export controls on software. The timing muted the announcement\u2019s impact on US\u00a0equities markets and left Asian markets largely untouched,1<\/a> but crypto\u00a0absorbed the full shock of the Trump-induced panic. The episode compressed a global liquidity crisis into less than an hour \u2014 a sign that the market most eager to be taken seriously may also be the one least equipped to handle real-world shocks.<\/p>\n

Bitcoin shed more than $10,000 in a matter of minutes, with the flash crash wiping out at least 10% of its value instantly and pushing prices 15% below their morning levels. Traders holding $19\u00a0billion in leveraged positions were liquidated in a blink, and complaints erupted on social media as crypto platform glitches exacerbated losses.<\/p>\n

The worst of the chaos was over quickly, and Trump\u2019s Sunday retreat from his bold threats made only days prior helped to further stabilize jumpy markets \u2014 though bitcoin continues to trade down about 13% below its price from that morning, and 16% below its all-time high set only the prior Monday. But the October\u00a010 panic gave a valuable reminder of the frightening speed at which crypto markets can unravel, and a dire warning for a future scenario in which crypto is further integrated into traditional finance.<\/p>\n

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The initial sell-off<\/p>\n

The markets were already rattled by China\u2019s October 9 announcement that it would tighten its grip on rare-earth mineral exports \u2014 crucial materials for high-tech manufacturing that China controls through its near-monopoly on processing. This was viewed as an escalation in the ongoing economic conflict between the two superpowers, which has already left some analysts fearing market crashes or even a global recession.<\/p>\n

Trump\u2019s choice to retaliate with threats of an enormous tariff hike renewed fears of severe economic turmoil and disrupted supply chains. Traders panic-sold high-risk assets like cryptocurrency, with some fleeing to the safety<\/a> of Treasury bonds and gold. (Bitcoin advocates\u2019 claim that bitcoin functions as \u201cdigital gold\u201d has, once again, not held up under pressure.)<\/p>\n

In the span of minutes, Bitcoin plummeted around 10%. Altcoins plunged even more steeply, with the popular Solana token diving 40% and Trump\u2019s own memecoin falling more than 60%. The trading firm Wintermute reported that the median crypto token price drop was around 54%, and more than 90% of tokens lost more than 10% of their value.2<\/a><\/p>\n

Crypto\u2019s generally illiquid markets contributed to the price volatility. CoinDesk reported that \u201cmarket depth collapsed by more than 80% across major exchanges within minutes.\u201d3<\/a> Market makers \u2014 institutions that normally provide liquidity and price stability by taking the opposite side of trades \u2014 came under fire as some accused them of amplifying the crash by withdrawing liquidity during this crucial period. The Coinwatch crypto tracking platform accused market makers of \u201cdesert[ing] their responsibility\u201d,4<\/a> and blockchain analyst YQ alleged \u201cthey executed a coordinated withdrawal at the optimal moment to minimize their losses while maximizing subsequent opportunities.\u201d5<\/a> Others characterized these institutions\u2019 pullback as a normal risk management response to elevated volatility, and the predictable actions of firms with no mandate to maintain market stability at the expense of their trading books. Regardless of the reason, the severe lack of market depth resulted in extreme price dislocations across exchanges. On Binance, the Cosmos token momentarily appeared to plummet in value from $3.90 to a tenth of a cent.<\/p>\n

Unlike traditional equities markets, where circuit breakers<\/a> or other mechanisms to halt trading force cool-down periods when assets encounter extreme volatility, crypto markets are all gas, no brakes. When prices start falling rapidly, there\u2019s no systemwide pause to allow liquidity to rebuild or for traders to take a breather and reconsider the risk.<\/p>\n

Crypto exchange glitches<\/p>\n

As trading activity spiked on exchanges and prices whipsawed, multiple centralized platforms suffered glitches. Binance\u2019s site went completely down at one point, and customers reported unexplained account freezes, unsuccessful trades, and automated protections like stop-losses failing to trigger. Several tokens intended to be maintain pegs to other assets, such as USDe, de-pegged on Binance\u2019s Earn program. Coinbase\u2019s status page claimed there was \u201clatency or degraded performance when transacting\u201d, although customers widely reported not being able to trade at all. The Kraken app showed customers a vague \u201csomething went wrong\u201d screen, and customers reported similar issues with trades not completing and stop-losses not triggering. Robinhood users also reported the app freezing, and attempted trades not going through. Other exchanges including OKX, Bitget, and MEXC had intermittent outages, delayed trades, or inaccurate price information.<\/p>\n

Though arbitrage traders and bots typically help to keep the price of any given asset consistent across exchanges by capitalizing on small discrepancies, the cascade of technical failures\u00a0\u2014 stuck trades, failed or delayed withdrawals, and inaccurate or nonfunctional pricing data feeds\u00a0\u2014 allowed prices to wildly diverge from one exchange to another.<\/p>\n

Some have accused centralized exchanges of minimizing their own losses at their customers\u2019 expense by intentionally halting trading or withdrawals under the guise of \u201ctechnical difficulties\u201d. Indeed, it is suspiciously common for supposedly highly sophisticated centralized exchanges to suddenly experience glitches or announce urgent \u201cmaintenance\u201d under far less volatile circumstances. Kris Marszalek, founder of the Crypto.com centralized exchange, was among the most prominent to repeat this allegation, tweeting that regulators should investigate rival exchanges to determine if any \u201cslow[ed] down to a halt, effectively not allowing people to trade\u201d.6<\/a><\/p>\n

Leverage<\/p>\n

The biggest factor in the Friday crash was leverage. As I described in my most recent recap<\/a>, crypto leverage \u2014 whether through borrowing programs, margin trading, or perpetual futures \u2014 creates a cycle of risk that can rapidly snowball.<\/p>\n

Borrowers often borrow against, say, bitcoin in order to buy more bitcoin. This creates a feedback loop of risk: when bitcoin prices fall, borrowers simultaneously lose value on their original collateral and on their newly acquired bitcoin, rapidly pushing them toward overleveraged positions. When numerous borrowers are forced to liquidate at once, the resulting sell pressure can create a snowball effect that drives prices down further and becomes very difficult to stop.<\/p>\n

This is precisely what happened. Price dips from the first wave of crypto sell-offs caused some leveraged positions and crypto loans to be automatically liquidated as platforms determined there wasn\u2019t sufficient margin to keep them open. As exchanges forcibly liquidated these positions, they contributed to the sell pressure, causing prices to drop further, triggering more margin calls \u2014 the classic crypto \u201cdeath spiral\u201d.<\/p>\n

And some traders don\u2019t just borrow crypto against dollars or stablecoins, but borrow volatile cryptoassets against other volatile cryptoassets. In crashes like this, where the prices of many cryptocurrencies were all simultaneously dropping, these positions were even more volatile because traders\u2019 debt burden was growing as their collateral value was diminishing \u2014 causing positions to be liquidated much more rapidly than if the collateral was fixed. And in these types of positions, if a trader is forcibly liquidated, exchanges sometimes need to sell off the loan collateral as well as the borrowed asset, causing sell pressure for both assets.<\/p>\n

As prices fall, those trading on leverage are often given an opportunity to restore their positions to a \u201chealthy\u201d state by adding more collateral, thus increasing their margin level. But with the often slow process of converting fiat currency into cryptocurrency, often the only option for traders to obtain more crypto to use as collateral in an emergency is to sell off other crypto assets. This contributes to overall sell pressure as traders panic-sell assets to shore up their leveraged positions. And in rapidly falling markets, traders can be wiped out before they have any chance to add collateral.<\/p>\n

These issues were amplified by crypto exchange glitches, where malfunctioning price feeds and de-pegged assets caused erroneous liquidations based on inaccurate prices. (Binance later paid out $283\u00a0million to compensate users who had been erroneously liquidated due to apparent de-pegs on their platform,7<\/a> plus another $400\u00a0million to traders and institutions that were wiped out due to legitimate liquidations.8<\/a>) On platforms where trades failed or faced significant delays, some customers watched their leveraged positions get forcibly liquidated in front of their eyes as they were unable to top up collateral.<\/p>\n

By the end of the flash crash, more than $19\u00a0billion had been liquidated.<\/p>\n

While leverage exists in traditional markets too, the crypto industry takes it to new extremes. Traditional brokers typically limit margin trading to 2\u20134\u00d7 leverage, require stable assets like dollars or blue-chip stocks as collateral, and must follow strict regulatory requirements around position monitoring and risk management. But crypto exchanges routinely offer leverage up to 100\u00d7 or more, accept volatile cryptocurrencies as collateral, and operate with minimal oversight. Traditional markets also have circuit breakers and trading halts that can pause cascading liquidations, and brokers typically follow careful procedures with multiple warning thresholds before forcing positions to close. In crypto, a position can be liquidated before a trader even knows they\u2019re in trouble.<\/p>\n

Auto-deleveraging<\/p>\n

Crypto exchanges that offer leverage trading take on the risk that markets can fall faster than leveraged positions can be liquidated. They typically maintain \u201cinsurance funds\u201d to absorb the occasional residual losses in these cases. But what happens if that insurance fund runs dry? In some cases, the exchanges collapse, and losses are spread across all of the platform\u2019s customers. (Sam Bankman-Fried has repeatedly claimed that FTX\u2019s collapse was thanks to oversized margin trades gone bad, though this explanation conflicts with the evidence that FTX had been secretly diverting customer deposits to cover Alameda Research\u2019s losses long before the crash.)<\/p>\n

But many platforms have implemented a system called auto-deleveraging, which is sometimes analogized to an emergency brake for when things start to get out of control. In these cases, exchanges may reduce other traders\u2019 profitable leveraged positions to rescue an underwater position.<\/p>\n

During this crypto crash, exchanges began to blow through their insurance funds. Binance, for example, dipped into its insurance fund to the tune of around $188\u00a0million over just that one day.<\/p>\n

\"ABinance\u2019s claimed insurance fund balance (Binance<\/a>, geofenced)<\/p>\n

And so multiple platforms resorted to auto-deleveraging. Among them was Hyperliquid, a buzzy defi trading platform, whose founder stated that \u201cthis was Hyperliquid\u2019s first cross-margin ADL in more than 2 years of operation\u201d and that \u201cbillions of dollars worth of positions [were] liquidated on Hyperliquid in a matter of minutes.\u201d9<\/a> This helped stop the bleeding somewhat, and likely saved some exchanges from collapse. However, the early closures of short positions also removed even more orders from order books, thinning liquidity even further and potentially making it harder for markets to stabilize.<\/p>\n

Insider trading allegations<\/p>\n

In the aftermath, analysts noticed a wallet that had deposited millions into the Hyperliquid decentralized exchange before the crash, taking a heavily leveraged short position on bitcoin and ether. When the market plummeted, they profited to the tune of more than $150\u00a0million. The remarkable timing led some researchers and institutions to question whether the trader had inside information from the White House about upcoming tariff announcements, and the blockchain analytics company Arkham labeled the wallet \u201cTrump insider whale\u201d on their platform.10<\/a><\/p>\n

Some researchers suggested that the wallet might belong to Garrett Jin, the former CEO of BitForex, a Hong Kong-based exchange that shut down in early 2024 amid exit-scam allegations [W3IGG<\/a>]. Without initially addressing whether he controlled the wallet, Jin posted to Twitter that \u201cI have no connection with the Trump family or Donald Trump Jr. \u2014 this isn\u2019t insider trading\u201d, but then later deleted the tweet. Other crypto sleuths have questioned whether Jin really controlled the wallet or is merely connected to the person who does.11<\/a> Jin later tweeted, \u201cThe fund isn\u2019t mine \u2014 it\u2019s my clients\u2019.\u201d12<\/a><\/p>\n

In traditional markets, a $150\u00a0million profit on well-timed shorts ahead of a presidential announcement might trigger inquiries from the SEC, CFTC, or DOJ. But in crypto, it\u2019s not even clear which agency, if any, would have authority to investigate crypto trades around government announcements. Hyperliquid is based offshore, the possible wallet owner may be as well, and regulatory jurisdiction over cryptocurrency remains hotly contested. It\u2019s not clear which authority has the mandate \u2014 or perhaps the appetite \u2014 to investigate potential insider trading.<\/p>\n

The fallout<\/p>\n

While crypto prices stabilized fairly quickly, though without returning to their earlier highs, many traders suffered huge losses. Retail traders were the most impacted in terms of the raw numbers of liquidations, though institutional traders lost the most in terms of dollar amounts. Social media was flooded with stories (of varying credibility) of people losing massive sums \u2014 or massive portions of their net worth \u2014 in the crash. A Ukrainian crypto influencer named Konstantin Galish was found dead in his Lamborghini in a possible suicide after reportedly losing millions of dollars in investor funds in the crash (though some local news outlets have questioned the circumstances of his death).13<\/a><\/p>\n

The true extent of damage to institutions may be slow to reveal itself, though that Binance apparently felt the need to hastily implement a $100\u00a0million institutional bail-out program is telling. While rumors have swirled that a trading firm blew up, we often don\u2019t learn about such catastrophes until well after the crash. And if such crypto funds were wiped out, contagion can be slow to emerge, as we saw in 2021 when the implosion of the Three Arrows Capital hedge fund led to a steady drumbeat of other firms going bankrupt or announcing major losses over subsequent months.<\/p>\n

This flash crash, while violent, was ultimately fairly contained. The cascade of liquidations eventually exhausted itself, easing sell pressure. After the rapid wipeout was over, market makers and arbitrageurs returned to \u201cbuy the dip\u201d and profit from price discrepancies across platforms, stabilizing and re-synchronizing prices. And Trump\u2019s quickness to walk back his threats helped ease the nerves across markets. But the meltdown reminded us just how quickly crypto markets can unravel when an abrupt shock pierces the euphoria of traders who\u2019ve been watching prices steadily rise, and seem to forget they can do anything else.<\/p>\n

The lack of circuit breakers, massive leverage, technical fragilities, and overwhelming complexity of interwoven crypto assets all combined for a devastating crash. Regulators are unlikely to take any significant action. Exchanges will continue offering extreme leverage while platforms remain without circuit breakers. The industry keeps pushing for greater integration with traditional finance, demanding even fewer restrictions on the high-risk products they market to unsophisticated investors. As crypto grows more interconnected with mainstream finance, future crashes will reach far more widely.<\/p>\n

Have information? Send tips (no PR) to molly0xfff.07 on Signal or molly@mollywhite.net (PGP<\/a>).<\/p>\n

I have\u00a0disclosures<\/a>\u00a0for\u00a0my\u00a0work and writing pertaining to cryptocurrencies.<\/p>\n

References<\/p>\n

\u201cThe Curious Market Timing of Trump\u2019s Tariff Threats<\/a>\u201d, Bloomberg. \u21a9<\/a><\/p>\n

\u201cMarket Update: 13 Oct 2025<\/a>\u201d, Wintermute. \u21a9<\/a><\/p>\n

\u201cCrypto\u2019s Black Friday<\/a>\u201d, CoinDesk. \u21a9<\/a><\/p>\n

Tweet<\/a> by Coinwatch. \u21a9<\/a><\/p>\n

Tweet<\/a> by YQ. \u21a9<\/a><\/p>\n

Tweet<\/a> by Kris Marszalek. \u21a9<\/a><\/p>\n

\u201cBinance Reimburses $283M After Market Crash and Asset Depegging Issues<\/a>\u201d, Decrypt. \u21a9<\/a><\/p>\n

\u201cBinance launches $400 million initiative to refund users, instill market confidence following crypto flash crash<\/a>\u201d, The Block. \u21a9<\/a><\/p>\n

Tweet<\/a> by Jeff Yan. \u21a9<\/a><\/p>\n

\u201cAlleged ‘Trump Insider Whale’ Denies Insider Trading, Opens New $340 Million Bitcoin Short<\/a>\u201d, Decrypt. \u21a9<\/a><\/p>\n

\u201cAlleged Hyperliquid whale denies Trump ties, thanks CZ for doxing, and pitches market stabilization fund<\/a>\u201d, The Block. \u21a9<\/a><\/p>\n

Tweet<\/a> by Garrett Jin. \u21a9<\/a><\/p>\n

\u201cCrypto Kingpin Turns Up Dead in Lamborghini After Market Crash<\/a>\u201d, Futurism. \u21a9<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"At 4:50\u00a0pm on October\u00a010, when traditional markets were closed, Donald Trump launched a new salvo in the simmering…\n","protected":false},"author":2,"featured_media":232349,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[28,112],"class_list":["post-232348","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","tag-business","tag-markets"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/232348","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=232348"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/232348\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/232349"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=232348"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=232348"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=232348"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}