HashKey Group Senior Researcher Tim Sun
The past weekend was undoubtedly one of the darkest moments for many. According to public reports, the market crash that began in the early hours of October 11 triggered a chain of liquidations, with a single-day liquidation amount exceeding $19 billion, more than ten times the peak of single-day liquidations in the history of cryptocurrency. From the collective plunge of CEX to Perp Dex, from market makers withdrawing liquidity to stablecoins decoupling, the events that unfolded in just one hour far exceeded anyone's imagination.
Some say this was a black swan event, others attribute it to exchange failures, and some argue that it was a liquidity liquidation that should have happened long ago. Looking back, the situation is more complex than it seems.
The Trigger: Tariffs and Trade Wars Are Not New, Why Such a Strong Market Reaction?
Historically, black swan events are often caused by a project blowing up or a severe shock from an external macro variable. Although the trigger this time stemmed from the US-China trade conflict and Trump's announcement of tariff escalations.
In fact, the aforementioned factors are not "sudden events"; the return of tariffs and trade wars is not particularly surprising. In terms of the extent of the decline, both the US stock market and BTC are far from experiencing a historic crash, not to mention that Bitcoin quickly recovered to above $110,000 after the drop.
As we analyzed earlier, since the interest rate cuts were implemented in September, although the market is confident that the subsequent rate-cutting path will continue, the persistent weakness in the US labor market has brought recession trading back into focus. Rising inflation, declining employment, increasing debt burdens, and fiscal policy reversals are continuously piling up structural risks that are compressing market resilience.
More importantly, if we observe the Federal Reserve's net liquidity indicators, the rate cuts have not significantly increased market liquidity, yet the market's optimistic sentiment continues to be overdrawn.
In this context, a "not-so-new" negative narrative is enough to become the straw that breaks the camel's back. The issue is not how significant the negative news is, but rather that the market itself has become extremely fragile.
Risk Resonance: The Transmission Chain Behind Liquidity Cliffs, Decoupling, and Chain Liquidations
Although the market decline was predictable, no one anticipated the drop and liquidation of altcoins, which were far deeper and more intense than imagined.
Around 5:00 AM on October 11 (Beijing time), before the Asian markets opened and as European and American markets were nearing closing, liquidity was already relatively weak. Bitcoin and US stocks synchronized in their pullbacks, but the market reaction was still within a normal range.
The real disaster began with the high-density liquidation wave of altcoins at 5:20 and the simultaneous decoupling and plummeting of three major assets (USDe, wBETH, BNSOL) at 5:40.
From a timeline perspective, this plunge and liquidation were not due to issues with the assets themselves, but rather the embedded leverage structures and platform mechanisms became the points of attack that were breached.
In other words, this was not a collective sell-off caused by synchronized panic, but a system-level chain reaction triggered by price declines, where specific assets were breached first due to their positions and parameter settings within the platform structure, further amplifying the market's resonance.
A possible transmission path is:
When the first wave of significant declines hit, the first to be affected were the positions of market makers. Since this round of declines occurred during a period of already thin liquidity, many market makers failed to hedge tail risks in time and had to urgently withdraw from the liquidity pool. This step directly weakened the market's buffer.
Subsequently, the liquidity of altcoins dried up, and spot prices began to plummet, especially for assets with weak liquidity, leading to marked asset prices rapidly decoupling and collateral values shrinking.
If these assets were used in a unified account as margin, the platform would automatically trigger a chain of forced liquidations. Users not only lost their positions, but other held assets were also liquidated in succession, further creating widespread selling pressure.
The market's absorption capacity completely collapsed, triggering a liquidity cascade, and localized issues evolved into systemic risks.
It must be pointed out that behind this cascade, there is an important background: during this cycle, multiple exchanges launched a unified account margin model, allowing users to mix various assets as margin to open positions.
At first glance, this greatly improved capital efficiency, but in extreme market conditions, its negative effects can be more fatal. Once the price of a certain asset falls below the liquidation line, it will force liquidate other assets in the entire account; multiple assets embedded in high collateral, low depth liquidity structures can create a chain reaction of liquidation when attacked or fluctuated.
Taking USDe as an example, on the surface, it is pegged to USDT at a 1:1 price, exhibiting trading characteristics similar to stablecoins, but its price peg is not based on real reserve support, but rather achieved through financial derivative structures, essentially a type of stablecoin-like hedging derivative.
This mechanism is extremely reliant on the liquidity and hedging efficiency of the derivatives market. Once the market experiences severe fluctuations, contract hedging may encounter slippage, delays, or mismatches, leading to large-scale decoupling.
More dangerously, if there is a lack of effective dynamic risk management mechanisms, treating it as a stablecoin and using it for widespread circular lending, margin, or liquidity mining, its leverage risk can be exponentially amplified.
In this event, many users and market makers used USDe as a high-collateral-weight asset for contract margins. When its price decoupled, the value of positions was directly halved, equivalent to a sudden doubling of leverage, resulting in indiscriminate liquidations even if the contract leverage was very low.
The liquidation crisis itself is a macro emotional overdraw, compounded by the structural fragility of market leverage, resulting in a rare resonance effect.
Lessons and Outlook: Aftershocks Persist, Uncertainties Remain
Risk is never linearly transmitted; in a highly coupled market, it often ignites through emotions, accelerates through leverage, and amplifies through liquidity, ultimately evolving into a systemic collapse of the entire chain.
Such cases are not uncommon in the traditional financial world, which is why the traditional financial sector emphasizes strict compliance frameworks and risk control standards. Any financial innovation, if lacking corresponding risk constraints, will not be a black rhino but a gray rhino that is destined to come. Financial efficiency and systemic safety are always two sides of the same coin; such lessons are enough after just one occurrence.
Returning to the event itself, as analyzed at the beginning, tariffs and trade wars are sudden but not unexpected. In a scenario where the benefits of cooperation far outweigh confrontation, the narrative of trade conflict is bound to gradually ease, which undoubtedly plays a significant role in alleviating market sentiment.
However, the impact of leveraged liquidations on the market has not yet ended, and the widespread effects make the restoration of market confidence full of uncertainties. On a positive note, in such a thorough deleveraging situation, as long as there are no major negative shocks to external macro liquidity, the market may find it easier to recover upwards.
If we extend our perspective further, against the backdrop of persistently weak global economic fundamentals, a gradual warming of liquidity remains the main theme, and crypto assets are still firmly on the path of mainstreaming, institutionalization, and compliance.
After the storm, it is worth considering: have we truly reserved enough buffer mechanisms for the complexity of the market? Have we built a solid infrastructure for user trust?
It is foreseeable that the future market will place greater emphasis on regulatory clarity, mechanisms for protecting user rights, and transparency in information disclosure.
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