Coinbase: The aftermath of October 11th: From Uptober to Voltober

Source: Coinbase; Compiled by: Golden Finance

There are no simple answers to the story of excessive leverage

Currently, multiple institutions are attempting to decipher the events that led to the October 11th cryptocurrency market crash, which wiped out over $19 billion in leveraged positions. Therefore, we won't dwell too deeply on the causes, events, timing, and causes of the event, or simply correct any misunderstandings about the sequence of events. Instead, we're more focused on the impact this crash has had on the current state of the cryptocurrency market.

While the immediate catalyst was President Trump's tweet announcing a 100% tariff on Chinese imports, several factors contributed to the severity of the event. These include excessive leverage, fragmented liquidity across exchanges, and the rise of cross-margin collateral—all of which mask the overall risk taken by many large cryptocurrency traders.

Indeed, we believe that market concepts like price convexity are difficult (or at least unintuitive) for most market participants to understand, but the additional challenges posed by thinly traded altcoin markets also contribute to poor risk management. Additionally, platforms are now more interconnected than ever before, which can have unexpected impacts on trading. It’s difficult to pinpoint exactly how much leverage is being flushed out of the system, but below we use the ratio of total open interest in perpetual futures and options relative to the total market capitalization of cryptocurrencies excluding stablecoins across platforms (including centralized exchanges like Binance and Deribit and decentralized exchanges like Hyperliquid). Figure 1. Systemic Leverage Records One of the Largest Forced Liquidations in Cryptocurrency History. The systemic leverage ratio tells us that prior to the wave of liquidations, pure speculative exposure in the cryptocurrency market (i.e., counting only directional bets, excluding hedging) was close to 7%. That is, since early May, we have seen rising systemic leverage, with derivatives exposure nearly doubling relative to the cryptocurrency market capitalization. The sharp drop on October 11 (see Figure 1) reflected a massive deleveraging to levels below 4%, which has since rebounded slightly this week and is now back to where it was at the beginning of the year. Our View: The steady climb in leverage earlier this year exemplifies the procyclical nature of leverage in the cryptocurrency space, as the growth of speculative positions outpaces the growth of the underlying cryptocurrency's market capitalization, exacerbating market fragility. On the other hand, the chart nicely illustrates how the market has returned to structurally healthier leverage levels following the "cleanup," perhaps setting the stage for a potential rally. Even so, the timing remains highly uncertain. As noted in our October Positioning Report, the altcoin open interest to open interest dominance ratio remains above the dangerous 1.4 mark, a level previously seen before past liquidation waves—a cause for concern. Following the leverage spike on October 11th, the ratio ultimately reset to approximately 1.2. We believe this reduces the likelihood of another near-term sharp drop, but does not necessarily portend a Bitcoin rebound; from here on, as volatility from liquidations tapers off, price action may hinge more on macro and global liquidity. Figure 2. Altcoin Open Interest Dominance Ratio Returns to Danger Zone A theory circulating on social media suggests that the drop in USDe (Ethena's synthetic stablecoin) on Binance may have triggered a cascade of liquidations; however, we believe this theory does not accurately reflect the correct sequence of events. In fact, altcoins were the first to sell off—cryptocurrencies like SUI hit intraday lows before USDe fell below $1 on Binance—suggesting a liquidity shock had already begun (Chart 3). Following the tariff announcement, market makers pulled back quotes, eliminating depth, and thin order books created gaps in sell orders. This initial vacuum triggered forced liquidations across major currencies and altcoins. Only then did the pressure spread to stablecoins. USDe's discount appears to have been driven by DeFi platforms. In other words, Binance's USDe depeg was not due to a solvency issue with the protocol, but rather a chain reaction. The largest drop (approximately $0.65) was concentrated on Binance, while USDe prices on major DeFi platforms remained closer to par, and redemptions remained functional. We believe the most plausible reason for this divergence is strain on exchange plumbing: as top-of-book size evaporated and internal pricing/oracle logic relied heavily on its own order book, USDe's spot value on the venue declined further, feeding into margin/borrowing systems and deepening local discounts. Our View: USDe re-pegged (on Binance and other platforms) within hours as liquidity providers returned and spreads normalized—behavior consistent with a temporary liquidity vacuum rather than a collateral failure. Figure 3. USDe Depegging Following Altcoin Liquidations