Crypto Market Sell-Off Overview

Friday’s sell-off was labeled the worst liquidation event in crypto history, erasing over $20 billion as liquidity disappeared and forced deleveraging took hold, according to Bitwise portfolio manager Jonathan Man in an article on X published Saturday.

What Happened?

Perpetual futures, or “perps,” are cash-settled contracts that reflect spot prices through funding payments instead of physical delivery. Profits and losses are managed through a shared margin pool, necessitating rapid reallocation of exposure during market stress to maintain balance.

Man noted that bitcoin dropped 13% in just one hour, with some long-tail tokens suffering even greater losses; for example, ATOM fell to nearly zero on various platforms before recovering. He estimated that around $65 billion in open interest was wiped out, bringing positioning back to levels not seen since July. According to Man, while the big numbers are significant, the underlying mechanics—the ‘plumbing’ of the market—are even more crucial. When uncertainty surges, liquidity providers typically widen quotes or retreat to manage capital, exacerbating liquidity issues.

Market Reactions

In this environment, exchanges activated contingency measures like auto-deleveraging, forcibly closing profitable positions when the losing side could not provide sufficient cash. Additionally, liquidity vaults, such as Hyperliquid’s HLP, had profitable days, buying low and selling high.

Centralized vs. DeFi

Man observed that centralized exchanges experienced the most significant disruptions as order books became thin, leading to sharper declines in long-tail tokens compared to bitcoin and ether. In contrast, DeFi liquidations were less severe due to major lending protocols accepting more stable collateral like BTC and ETH, with Aave and Morpho hardcoding USDe’s price to $1, thereby limiting cascade risks.

While USDe remained solvent, it traded around $0.65 on centralized exchanges amid poor liquidity, leaving margin users vulnerable to liquidation.

Risks and Opportunities

Beyond typical directional traders, Man flagged hidden risks for market-neutral funds. Key operational risks on volatile days include algorithm performance, exchange stability, accurate pricing, margin movement, and timely execution of hedges. Although he confirmed many trading teams remained stable, he noted the potential for weaker teams to face significant losses.

Furthermore, he noted unusual price dispersion across exchanges, with spreads exceeding $300 between Binance and Hyperliquid on ETH-USD.

Following the dramatic lows, prices rebounded, and market positioning flushes presented new opportunities for traders with available capital. Man concluded that with open interest sharply reduced, markets entered the weekend on a more stable footing than previously.