The crypto industry has recently had some of its worst days in history. And while Bitcoin and Ether holders seem to have weathered some of the carnage, traders in many lesser-known tokens are still feeling great pain.
In the 24 hours starting on Friday, October 10th, more than 1.6 million traders were affected by the elimination of leveraged positions totaling $19.37 billion. This is the largest liquidation event in history tracked by Coinglass, a data analytics firm specializing in cryptocurrencies. The wipeout marks a dark spot for digital asset markets in a strong year for cryptocurrencies, with Bitcoin and Ether hitting record highs. More than a week has passed since the event, and its ripples are being felt most on smaller coins.
According to a CNBC analysis of CoinMetrics data, Bitcoin and Ether are each trading around 11% to 12% below their October 10 highs, with the former token trading above a key resistance level of $100,000 and the latter within range of the key $4,000 price. Lesser-known coins such as XRP, Solana, Dogecoin, and BNB are trading between 15% and 24% of their pre-liquidation crisis highs.
The relative resilience of Bitcoin and Ether is largely due to the fact that the two largest cryptocurrencies by market capitalization are older and more established than alternative digital assets, Frank Chaparro, head of content and special projects at GSR, told CNBC.
Bitcoin vs Solana 1 month chart
“Those are larger, more established assets, with ETFs and other structured products behind them,” Chaparro said. “Long-tail tokens are less mature, less liquid, and naturally more volatile.”
Chaparro also pointed out that Bitcoin and Ether suffered fewer losses compared to alternative crypto assets during this month’s large liquidation events.
Solana, dogecoin, XRP, and BNB are often used for leveraged trading on centralized or decentralized exchanges. According to Wintermute, a market maker specializing in cryptocurrencies, mid-cap and small-cap digital assets fell 60% to 80% at the peak of the liquidation event, while Bitcoin and Ether were down just 11% and 13%.
“Cryptocurrencies have always had a huge impact,” Tom Lee, head of research at Fundstrat Global Advisors, told CNBC last week. “Volatility and leverage are what draws people into markets other than Bitcoin and Ethereum, especially where they typically don’t hold margin.”
Leverage refers to the funds a trader borrows to open a position larger than the initial capital or margin he or she pays up front. A position is liquidated or forcefully closed if the collateral used by the trader to secure the position is no longer sufficient to cover the losses.
“Doom Loop”
The crypto sweep came after US President Donald Trump vowed to impose “massive” tariffs on China early on October 10, sending ripples across financial markets. And while fallout from major geopolitical announcements is normal in digital asset markets, in this case traders were hit even harder by the unwinding of many leveraged positions.
“Effectively, we have what’s called a loop of doom, where a drop in opening price triggers some liquidations, and then when we unwind those positions into a thin order book, the spot price of the unwound asset craters,” Chaparro said.
According to Chaparro, these price declines will cause crypto exchanges’ margin systems to change the way traders look at their collateral, leading to more positions being unwound. “If you have 100,000 Bitcoins as collateral, your collateral position is much different than when it is trading at 70,000. So more accounts become undercollateralized and the cycle repeats.”
“It’s throwing gasoline on the fire in a way you don’t see in other highly leveraged markets,” the executive said.
100x cryptocurrency leverage?
There are a growing number of ways for traders to be exposed to cryptocurrencies, both in the United States and abroad. Last year, the U.S. approved the launch of several spot Bitcoin ETFs and exchange-traded funds tracking Ethereum, and issuers have since rolled out products boasting 2-3x leverage against the token’s movements.
Offshore decentralized exchanges such as Hyperliquid and Binance Labs-affiliated Aster are becoming increasingly popular among traders looking to bet on cryptocurrencies with more leverage. The former offers maximum leverage of 40x on Bitcoin and 25x on Ether, while Aster offers up to 1,001x leverage depending on the token.
Trading products with higher leverage are attractive to investors because they offer higher returns. But with the potential for higher rewards comes an even greater potential for loss, said Zach Pandle, head of research at Grayscale, an asset management firm specializing in cryptocurrencies.
“Increased leverage means increased risk in all financial markets,” Pandor told CNBC.
Moreover, leveraged trading infrastructure for cryptocurrencies has not evolved to match market specificities, Chaparro said.
“We have a 24/7 market that is effectively built on a 9-to-5 trading infrastructure, and the crypto market does not have traditional forces like circuit breakers that can easily prevent or eliminate stress,” Chaparro said.
“Liquidation events are a one-off in terms of the functionality and utility of these underlying assets, but they are not a one-off in terms of the fragile infrastructure of offshore derivatives markets,” he added.
What’s next?
Cryptocurrency researcher Molly White wrote on her blog that the October 10th liquidation event could be a harbinger of things to come in the crypto market and beyond.
“The meltdown was a reminder of how quickly crypto markets can collapse when a sudden shock hits the euphoria of traders who have been watching prices steadily rise and seem to forget what else is possible,” White said in a post last Friday. “Future crashes will be more widespread as cryptocurrencies become more closely tied to mainstream finance.”
Juan Leon, senior investment strategist at Bitwise, also raised the possibility that “we could see a major correction or bear market driven, at least in part, by these leveraged large-scale liquidations.”
However, unlike White, Leung believes that traditional financial institutions entering the crypto market could potentially use massive leverage to offset the impact of crypto-native players.
“There is more and more capital in the area where the players dominate, as opposed to a lot of small retail traders,” Leon said. “And as more institutional investors enter the space, some of that risk is mitigated because large institutional investors don’t take on 50x leveraged positions and tend to hold them longer.”
