Last Friday witnessed a staggering sell-off in the cryptocurrency markets, resulting in what Jonathan Man, portfolio manager at Bitwise, has described as the most severe liquidation event in crypto history. Over $20 billion vanished as liquidity dried up and forced deleveraging rapidly accelerated across exchanges.
Perpetual futures, known as “perps,” are widely used instruments providing exposure without an expiry date. These cash-settled contracts hedge positions via funding mechanisms rather than physical delivery. Because profits and losses are netted against a shared margin pool, trading platforms must dynamically reallocate risk when volatility intensifies to maintain balanced books.
Man, lead manager of the Bitwise Multi-Strategy Alpha Fund, highlighted the dramatic price movements: Bitcoin plunged approximately 13% within a single hour, while less prominent tokens experienced even steeper crashes. For instance, Cosmos (ATOM) briefly traded near zero on some venues before recovering as liquidity conditions improved.
He estimated that about $65 billion in open interest was erased during the turmoil, resetting market positioning to levels not seen since July. However, Man emphasized that the headline numbers were less critical than how underlying market infrastructure reacted. In periods of uncertainty, liquidity providers commonly widen bid-ask spreads or reduce exposure to manage risk, causing organic liquidations to halt at bankruptcy prices and prompting exchanges to employ emergency protocols.
Centralized venues deployed a range of safety mechanisms to stabilize operations. Auto-deleveraging triggered on multiple platforms, forcibly closing profitable counter-positions when cash on the losing side was insufficient to settle winning trades. Additionally, liquidity vaults like Hyperliquid’s HLP capitalized on distressed sales by purchasing assets at steep discounts and later offloading into rebounding prices, generating substantial profits amidst the chaos.
Man observed that centralized exchanges bore the brunt of volatility, with sharp order book thinning contributing to the pronounced sell-offs in smaller tokens compared to major cryptocurrencies like Bitcoin and Ether. In contrast, decentralized finance (DeFi) protocols experienced markedly subdued liquidation volumes. This relative resilience stemmed from widespread use of top-tier collateral such as BTC and ETH, and mechanisms like Aave and Morpho’s stablecoin USDe maintaining a hardcoded price peg to $1, which mitigated cascading liquidations.
Notably, despite USDe remaining technically solvent on-chain, it traded at heavily discounted levels around $0.65 on centralized platforms during bouts of illiquidity, exposing users who posted USDe as collateral on those venues to liquidation risks.
Beyond straightforward directional trades, Man highlighted significant operational challenges faced by market-neutral funds during such extreme events. Maintaining functioning algorithms, exchange uptime, accurate mark prices, and the logistical capacity to move margin and execute hedges promptly are critical. While many managers reported they weathered the episode, Man acknowledged that some lower-tier trading firms may have been adversely impacted.
The episode also exposed stark price disparities across venues. Man cited instances where the ETH-USD spread between Binance and Hyperliquid exceeded $300 at times, reflecting unusual market fragmentation during peak stress.
By the weekend, prices recovered from extreme lows as positions were reset, providing opportunities for well-capitalized traders. The significant decline in open interest entering the weekend suggested the market had stabilized to some degree compared to the preceding day.
Friday’s liquidation event thus offers a key indication of how risks manifest in today’s interconnected crypto markets and how critical market design and infrastructure are in managing extreme volatility.
