Flash Crash Shocks Alt Market

Key Takeaways

• US tariff threats on China drove equities down over 2% & crypto assets down more
• The crypto flash crash was caused by cascading margin liquidations on exchanges
• Recovery may take time as markets absorb the impact of this historic shock

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Digital Asset Commentary

The US government remains closed with no end in sight, but tariff threats and political posturing continue. On Friday, President Trump announced an additional 100% tariff on Chinese imports, effective November 1st, in response to what he described as trade hostility from China, particularly restrictions on rare earth metals. Although Trump walked back these comments and threats over the weekend, the damage had been done. The S&P 500 and Nasdaq each closed the day down more than 2%, with the sharp decline likely exacerbated by the growing use of 0-day-to-expiry (DTE) options and dealer hedging dynamics.

Crypto markets were hit even harder with centralized exchanges (CEX) experiencing order book dislocations and severe system strain. The sudden shock triggered a cascade of liquidations, resulting in the largest leveraged wipeout in crypto history, well over $19 billion. The true figure is likely higher, as CEX liquidations are underreported, particularly on Binance, which only logs one liquidation per second. Bitcoin plunged from a daily high above $122k to below $100k on some exchanges. On certain venues, coins briefly traded down to $0 after order books were emptied and market makers paused activity.

While DeFi platforms remained operational, most positions using cross margin were liquidated, as entire account balances served as collateral. Stablecoin pegs wavered, and some of Binance’s price oracles malfunctioned, leading the exchange to reimburse $283 million to affected users. Exchanges also activated Auto-Deleveraging (ADL), forcing profitable short traders to close positions to cover losses amid a flood of long liquidations and insufficient buy interest.

Market shocks like this usually take time to recover, with top-quality assets rebounding first; any bullish continuation is more likely later in Q4. Crypto assets may need to reconsolidate and form a new base before resuming an upward move.