Crypto Suffers Record $600B Crash as Leverage Unwinds

Historic crash: Last Friday, the crypto markets witnessed their largest wipeout ever. The total crypto market cap shrank by $600 billion (15%) within hours, and at least $20 billion in positions were liquidated, affecting 1.6 million traders. The drawdown was larger than during the 2021 flash crash and the FTX collapse, both in relative and absolute terms.

• A classic risk-off event? While a tweet by U.S. President Donald Trump threatening new tariffs on China may have been the spark, the scale of the collapse was mostly driven by structural dynamics within crypto markets themselves.

Q&A: With the dust now settling, we break down the core causes, hidden mechanics, and longer-term consequences of a day that may reshape crypto market structure.

1) Why was this crash so severe?

Two dynamics collided. First, Donald Trump’s announcement came after U.S. markets had closed, leaving crypto as the only major market still trading. Without ETF inflows or traditional market liquidity to absorb the shock, the entire repricing happened on crypto venues.

Second, leverage had quietly built up to its highest levels in years. A bullish environment, the rapid growth of perpetual DEXs like Hyperliquid, and widespread delta-neutral points-farming strategies (long on one venue, short on another) had created massive leveraged exposure, particularly in thinly traded altcoins.

When initial liquidations hit, they cascaded through the system. Open interest collapsed by over 60%, many assets plunged 70-90% within seconds, and liquidity vanished.

The chaos was compounded by exchange outages and sharp price dislocations: Binance was offline for nearly an hour, and other major centralized exchanges quoted wildly different prices.

2) How did market makers react, and why did that matter?

When volatility spiked, market makers stepped away from order books, as expected losses far outweighed potential profits. Because most of them have no obligation to provide liquidity in stressed conditions, they can pull back at any time.

This withdrawal left many assets with no natural bid, exposing the gap between their “paper” market caps and actual depth. The result was widespread failed executions, massive slippage, and brutal moves in long-tail tokens, with some collapsing to mere cents.

3) Why is everyone talking about Auto-Deleveraging (ADL)?

ADL is a last-resort mechanism that exchanges use to stay solvent when forced liquidations cannot be executed through the order book and losses from liquidations exceed what available buffers such as insurance funds can absorb.

It works by forcibly closing profitable positions on the opposite side of defaulting trades, with the most leveraged and most profitable traders usually closed first, even if their positions are fundamentally sound.

What made this event so controversial is how widely ADL was triggered and how little traders understand about its mechanics. Many suspect that some venues even tapped ADL before using their insurance funds, though details remain unclear. The result was tens of thousands of positions forcibly closed, often breaking supposedly delta-neutral strategies and wiping out traders who had not taken excessive risk.

The lack of transparency around how and when ADL is applied has led to renewed calls for clearer rules and better disclosure from exchanges.

4) What about Ethena? Didn't USDe significantly lose its dollar-peg?

On Binance, USDe briefly traded as low as $0.68, while remaining close to $1 on all other major venues. Put simply, this wasn’t a true depeg but a local mispricing caused by Binance using its own shallow order book as the primary price source. The same design flaw drove severe price crashes in several other wrapped assets, fueling further liquidations.

Interestingly, Ethena’s delta-neutral positions were not liquidated during the ADL waves, and reports that surfaced shortly after the crash suggested this was because the company had negotiated exemptions on the exchanges where it trades, though Ethena has not commented publicly. Another plausible explanation is that its unlevered positions, continuous profit sweeps, and focus on major pairs like BTC, ETH, and SOL, which saw no major ADL events, placed it low in auto-deleveraging queues.

Either way, the fact that its positions were not liquidated likely prevented major collateral losses and a deeper systemic depeg with broader consequences for the market.

Adrian Fritz is the Global Head of Research at 21Shares, a leading crypto ETP issuer, which oversees over $10 billion in assets.

The selloff was not a macro event but a structural, crypto-specific one. That distinction matters: core bull-market drivers like rate cuts and liquidity expansion remain intact. What the event did reveal, however, is the growing divergence between DeFi and CeFi resilience.

CeFi, especially Binance, showed its weaknesses: trading halted, liquidity thinned, and capital fled BNB Chain. Meanwhile, DeFi fared better. Protocols such as Aave and Morpho processed record-high liquidation volumes without bad debt or major disruption. Hyperliquid stayed fully operational, although it also had to trigger ADL. Ethena processed about $2 billion in redemptions over a 24-hour period without issues. This is also why onchain activity even saw a rise post-crash. Stablecoin flows confirm this rotation.

The broader takeaway: this was an inflection point accelerating existing trends. Capital and trust are moving toward permissionless infrastructure that scales under stress. Binance’s role as a systemic anchor is weakening, while DeFi’s robustness positions it as the structural backbone of the next market cycle.