This article is reprinted with authorization from Coin Market Trader, and the copyright belongs to the original author.
On October 11, Beijing time, the crypto market experienced the most severe "bloodbath" in history. Amidst the drastic price fluctuations, nearly 1.66 million investors across the network were liquidated, with a total liquidation amount reaching $40 billion, setting a new historical record. Many attribute this crisis to macro risk spillover (Trump's sudden attack) and the excessively high leverage levels in the crypto market, but the reality is far more complex.
Although the market's fear index (VIX) surged rapidly after Trump announced a 100% tariff increase on China, the impact of this tariff shock was clearly not as severe as in April. The key difference lies in the level of market panic and liquidity conditions. The peak of the market fear index (VIX) this time was far lower than the high of 52 in April, and the broad dollar liquidity remained stable, with the 3-month SOFR and cross-currency basis not experiencing the extreme fluctuations seen during the panic in April, indicating that the supply of dollars within the international banking system remains ample. Therefore, asset performance showed divergence, rather than the indiscriminate sell-off of over 5% in the Nasdaq seen in April. This shows that macro risk is only a minor factor.
So, is the overall leverage in the crypto market too high? Clearly, this conclusion is also inaccurate. There are two direct pieces of evidence: First, the maximum declines of Bitcoin and Ethereum were far lower than those during the extreme situations of 5.19 and 3.12, and core positions did not experience systemic deleveraging; second, the concentrated liquidation of altcoins occurred after 5:15 AM, at which point most altcoins had already dropped by over 70% (no leveraged market globally could withstand such a drop), and many investors in altcoins that were "decapitated" by flash loans had leverage below 2X. (In fact, many altcoin investors had very low leverage because these coins have been in a long-term downtrend with poor liquidity).
Where does the problem lie? The extensive misallocation of leveraged arbitrage mechanisms is undoubtedly the main culprit behind this crash, with the most typical being the circular loan strategy. Arbitrageurs borrow USDT by pledging tokens like BTC, ETH, and SOL, then exchange it for USDE to capture interest rate spreads; subsequently, they pledge USDE again to borrow more USDT, repeating this cycle to amplify their positions. In this process, if ETH and SOL are first converted into liquid staking tokens like WBETH or BNSOL before being pledged, they can maintain the same pledge rate as the original assets while additionally earning a layer of staking yield. Of course, some clever individuals choose to go all in by combining margin leverage accounts, using a bunch of half-dead altcoins as collateral to borrow USDT, and then buying USDE.
This layered leverage structure not only amplifies investment returns but also significantly increases the fragility of the entire system. When the market experiences drastic fluctuations, the liquidation order of circular loans is usually not a gentle, linear process, but more like a rapidly spreading "chain reaction" triggered by the collapse of key collateral. At this point, as liquidity is rapidly consumed, the market initiates the ADL (Automatic Deleveraging) mechanism, and even the lowest leveraged positions can be forcibly liquidated due to the instantaneous evaporation of collateral value, ultimately forming a death spiral of "price drop - liquidation sell-off - accelerated decline." In other words, the root cause of the catastrophic crash does not stem from retail investors using high leverage, but rather from the hidden leverage embedded in arbitrage strategies and complex financial engineering.
Even more critically, during the period of severe market fluctuations, a certain major exchange experienced a crash due to excessive load, causing many investors to be unable to add margin and close positions in time, leaving them to watch helplessly as their positions were forcibly liquidated. Meanwhile, it is unclear whether it was market makers triggering risk control mechanisms or an API malfunction (there have been reports of API anomalies), but after 5 AM, market makers at this major exchange withdrew liquidity on a large scale, leading to a free-fall decline in the market.
From videos recorded by some large holders, it can be seen that due to the massive scale of liquidations and processing, Binance took nearly an hour from taking over accounts to completing liquidation operations. This means that the severe decoupling of assets like USDe, WBETH, and BNSOL observed at 5:20 AM (for example, USDe once dropped to $0.66) was not an isolated secondary panic, but essentially a continuation and manifestation of circular loan liquidations: after the drastic fluctuations, the massive USDe, WBETH, and BNSOL collateral positions taken over by Binance's risk engine coincided with market makers withdrawing liquidity en masse, leading to a deep vacuum in market depth, and the concentrated selling pressure generated during the system's forced liquidation operations triggered a secondary price disaster.
If we set aside conspiracy theories, the core reasons for this crash can be summarized as follows:
First, most arbitrageurs severely underestimated the destructive power of the hidden leverage in circular loan strategies and the fragility of the financial system they depend on. Many investors mistakenly viewed USDE circular loans as simple stablecoin interest arbitrage, believing that as long as the first layer of collateral assets was not liquidated, they could rest easy. However, USDe is essentially a structured financial product based on a delta-neutral strategy, with volatility and potential risk exposure far greater than traditional fiat-backed stablecoins like USDT and USDC.
Second, there are systemic flaws in the exchange's infrastructure, product risk control systems, and market maker liquidity assurance mechanisms. Specifically, during extreme market fluctuations, the trading system failed to ensure smooth transactions between users and market makers; liquid staking tokens like WBETH and BNSOL, while enjoying the same pledge rates as native assets, did not receive corresponding liquidity guarantees; more importantly, when market makers collectively withdrew liquidity, causing the market mechanism to fail, the exchange lacked effective crisis response mechanisms, ultimately exacerbating the market's spiral decline (Bitmex had previously suspended trading due to market mechanism failure on March 12).
Even though many long-term low-leverage altcoin investors had prepared risk control measures for historical extreme situations like "3.12" and "5.19," they still could not escape this even more severe crash—one could say that they encountered all the worst-case scenarios. However, from the perspective of market structure, the scale of capital turnover brought about by this crash also reached a historical high, which objectively provides the possibility for the reconstruction of the altcoin market (lifting the burden of historical trapped positions).
Related: Why did some altcoins on Binance plummet to zero?
Original text: “Why do they believe the date of October 11 crash was a deliberate market shakeout?”
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