Letter 83: Market Crash Analysis

A few days ago we experienced the largest single-day liquidation crash in crypto history, and the largest daily drop in BTC price in history. By far.

Some perspective:

• This recent crash saw over $19bn in liquidations.

• The FTX crash in 2022 saw $1.6bn in liquidations.

• The Covid crash in 2020 saw $1.2bn in liquidations.

We’re talking about an order of magnitude worse in raw monetary terms.

Yeah, it was bad, and it might have been considerably worse due to underreporting, as Jeff from Hyperliquid also says in his post here.

One important caveat is that the total crypto market cap is much higher today than it was during the Covid and FTX periods, so while the crash was bad in pure numbers, the percentage drop for Bitcoin was at least not as bad as we’ve seen in the past.

Some more perspective:

• BTC went from ~$122k to ~$107k this time, a drop of 12%.

• During the Covid crash, BTC dropped from $8k to ~$4.6k, a drop of 42.5%.

• The Mt. Gox crash from 2013 saw BTC crash from ~$260 to ~$50, a drop of 80%.

If you haven’t lived through or experienced anything like this before, it was probably scary as all hell. Even if you’ve been around for a decade and lived through FTX, Covid, Terra Luna, and Mt. Gox, it was still scary as all hell.

Even though BTC and ETH didn’t drop that much in terms of a percentage, we saw altcoins get absolutely obliterated. Many were down 50-99% within the span of half an hour.

Whenever things tank this fast, this quickly, there’s a deep sense of doom and panic that hits us all. We don’t know exactly what’s happening, or why it’s happening. We’re simply stuck watching our portfolio and net worth plummet.

Then, usually, the market recovers a bit. Information starts to emerge as to what caused the crash, and with some logic and reason applied, we start to feel a bit better.

In today’s Letter, I’ll be trying to break down what happened, why it happened, and what lessons we can learn from it all. I’ll end by sharing my thoughts for the future and how I am thinking about my portfolio, as well as giving access to the new telegram chat we have for premium subscribers.

Information is still trickling in and we might not have the full story just yet, but we’re starting to get a decent picture of it.

What we know for sure happened:

1. Trump announced new tariffs on China and the potential of a new trade war heating up

2. Prices started crashing, slowly at first, before absolutely cratering over a period of about twenty minutes

3. Lots of accounts got liquidated across all platforms, with reports of exchanges breaking down and not functioning correctly. Some people had their positions automatically closed (Auto-Deleveraging, more on this below).

4. Notably this crash was felt much more on centralized exchanges over decentralized exchanges, with Binance specifically being the exchange that had the most significant crashes (ie ATOM went from $4 → $0.01, SUI went from $3.20 → $0.55, and many more crashes like these).

In the immediate aftermath there was a lot of wild speculation flying around. Rumours that “some big player had blown up” were all over the timeline. People were speaking about Wintermute, a large market-making firm, going insolvent. I even saw panic about Crypto.com and how users should withdraw their funds.

It’s always important to be mindful of keeping excessive funds on any decentralized exchange, but in this instance, it doesn’t appear that there was any such blow up.

The most likely scenario, based on my research, is that there was a targeted attack designed to cause the liquidation cascade — specifically on Binance.

This post breaks it down in more detail. Basically, there were 3 specific assets listed on Binance (USDe, wBETH, and BNSOL) that all depegged and crashed specifically on Binance and not other exchanges. Because a lot of traders used these assets as collateral for their leverage trading accounts, as their prices crashed, the liquidations began, and then escalated, and the ripples were felt throughout the entire ecosystem.

This is another post explaining the same thing.

In a way, events like these, while painful for many, are a good test for our overall ecosystem. We get to see the chinks in the armor of a fully onchain economy. We get to see who can withstand extreme levels of pressure, and who cannot. The protocols that hold firm, and the ones that wobble.

It’s hard to disagree with this post. The winners are winners for good reason. Ethena, one of the newest stablecoins on the market, and an algorithmic based one at that, held its peg. Aave continues to be the gold standard for DeFi, and Solana held up spectacularly well — especially considering that many times in the past, it would have struggled to process transactions at a time like this.

The losers are losers for good reason, too. Binance especially was a dumpster fire — they halted trading and had massive liquidations based on 3 of their tokens being mispriced on their exchange compared to the rest of the market.

Many perp dexes also faced significant difficulties, struggling to keep up with the volume and speed that it all happened. Users were unable to add margin, to open or close positions, and many were forced out of their positions due to something called ADL: Auto-Deleveraging.

Of all of the perp dexes, Hyperliquid appears to have handled things the best, maintaining 100% uptime with zero bad debt.

There’s a lot of confusion about ADL and how it works, and this thread breaks it down better than I could ever hope to.

The TLDR version is that perpetual trading is a zero-sum game. For every dollar spent long, there needs to be a dollar spent short. In extreme scenarios where there are mass liquidations and not enough funds on one side of the equation, the exchange may be forced to close a user’s position (Auto-Deleveraging) in order to avoid bad debt in the ecosystem.

It’s not ideal, but it is a necessary evil in order to keep things from breaking at the seams under extreme stress. Anyway, check out the post linked above for the full explanation — it’s well worth reading.

A lot has been said about the mysterious wallet that profited around $200m by shorting the market on Hyperliquid mere minutes before Trump’s tarrif announcement, and closing it near the exact bottom.

Is crypto rigged? Yes, of course. Life is rigged. Is it more rigged than the rest of the world? That’s up for debate.

One of the nice things about crypto is that a lot of this is onchain, and can be discovered and seen. There are probably all sorts of corrupt shenanigans going on in markets and governments all around the world that none of us have any insight into.

At least here, there’s a permanent, onchain record of some of this stuff.

Tbh, there’s not much that any of us can do about it anyway. We are all small fish in a giant ocean of giga whales. Even those with portfolios in the 7 or 8 figure range are small fry to the 9, 10 and 11 figure traders. The ones with the size to move trillion dollar markets.

The solution isn’t to whinge, complain, or get upset. It’s to understand the reality of the situation, and to set yourself up so that you’re as immune as possible to the antics of the bazillionaires.

The short answer? Don’t use leverage, unless you know what you’re doing, and if you have to ask, you don’t know wtf you’re doing.

I’m once again reminded of one of my favourite parables of all time:

If you’re joining alpha groups, listening to podcasts, reading newsletters, or following influencers, and looking for others to tell you when and how to use leverage… you should not be using leverage.

I, for one, am always telling people to avoid leverage. You truly don’t need it. I mention it time and time again as something to be wary of in my $0 → $10m guide. Especially at the higher portfolio values, it is simply too risky, and for every 1 person that succeeds in trading with leverage, there are 99 that fail.

If my yammering away about this results in just one person saving their bankroll, it will have been worth it.

But don’t take it from just me. If my words aren’t convincing enough, read some of these posts:

1. Tsubasa on perps being a zero sum game, and why you should avoid perps

2. Cobie saying it’s one of the most severe flushes he’s ever seen on alts

3. Bonk Guy got liquidated for $15m and shares his thoughts

4. The White Whale loses $62m (!!)

5. Huang loses $9m, calling it the worst day of his life financially

6. Tsubasa on perps being a zero sum game, and why you should avoid perps (yes I wrote this twice, in the hopes that you will read it at least once, because it is just that important to read).