Welcome to your weekly Dark Markets news roundup, I’m veteran finance and technology journalist David Z. Morris. Just one story today - my preliminary attempt to untangle Friday’s massive crypto flash-crash.
Housekeeping: Don’t forget to pre-order my book, Stealing the Future - which contains many lessons about how to spot and avoid the traps we saw sprung again on Friday. And if you’re in New York, consider coming out to my book release event at Powerhouse Arena on November 11.
Share Dialog
Subscribe
TLDR: Crypto is a dark forest and arguably getting darker. The combination of lightly regulated exotic mechanisms, extreme leverage, and technical instability creates unquantifiable levels of risk, and the veneer of rational settlement can disappear in a second as the referees at centralized exchanges pick winners and losers.
On Thursday October 9, China announced it would be restricting the export of rare earth metals, front-running Donald Trump’s announcement of huge new China tarriffs and software controls on October 10.
After the Trump announcement, all hell broke loose across asset markets - but crypto markets proved, by some measures, the most fragile of all. $19 billion in leveraged positions were liquidated, an estimated ten times larger than liquidations during the 2022 crash after the collapse of FTX.
Everyone is still unpacking what exactly happened, and in situations like this it’s nearly impossible to create a comprehensive map of how problem a led to meltdown b and so on. Myself and Austin will be working on a more comprehensive analysis over at Zero In, so go over there and subscribe.
Dark Markets is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Subscribe
But in the meantime, what we have is a kind of scatterplot of a bunch of different things going hilariously wrong in interrelated and often compounding ways.
Here are the highlights (or rather, lowlights).
Hopium created Leverage created Crisis. Analyst Diogenes Casares told Laura Shin over the weekend that the fundamental underlying problem was an excess of optimistic leverage (longs) across the crypto ecosystem. Same as it ever was. Catalysts for the hopium bubble included the expectation of rate cuts and, most interesting, the huge surge in interest in offering perpetual futures trading, likely incentivized/subsidized heavily by trend-followers like … Metamask? What?
ETH and BTC Spot Holders are Fine. Because so much of this crash was technical, the market sharply recovered over the weekend. It’s still a bit rough (and dumping again Tuesday as I send this email), but true blue-chips (Ethereum and Bitcoin) were “only” down 8-10% from Friday to Monday, while many smaller “altcoins” like Telegram’s TON are still down more like 15-18%. The situation is worse the further out you go on the risk curve (or further down you go on the quality curve). Memecoins, even more vaporous than altcoins, remain down 20% or more - $Trump was down 20% by Monday, and the memecoin picks-and-shovels play Pump.Fun is down a gut-wrenching 36%. But even holders of the crappiest memecoin spot portfolios still did better than leveraged players.
Ethena’s USDe, a dollar “stablecoin” that’s actually more of a complex hedge strategy, depegged by as much as 35% on Binance and other exchanges. Because platforms had begun to accept USDe as leverage collateral in recent months, this move nuked levered players in ways that they would likely never have expected. It supports the thesis of my colleague Austin Campbell that USDe is not a stablecoin, and shouldn’t be marketed or used as one.
Decentralized exchanges, primarily Hyperliquid, showed their huge advantages over centralized exchanges like Binance. Binance’s infrastructure choked, with various APIs freezing at near the peak of frenzied activity, and its liquidations are notably opaque. This seems to be why Hyperliquid is showing higher liquidation stats - they’re all visible on-chain, while centralized exchanges may be massaging their numbers.
On the other hand, Hyperliquid was also more aggressive than other DEXs:
Altcoin market makers got taken to the woodshed. According to Casares, drawdowns like the ~95% crash in ATOM (Cosmos) on some exchanges were likely thanks to market makers tasked with providing liquidity being blown up in the flash crash, leaving no buyer of last resort. The resulting liquidity vacuum meant prices were free to fall - and revealed how much crypto outside of Ethereum and Bitcoin relies, not on an open market, but very coordinated support from paid actors.
An exchange called Backpack attracted massive heat for what appears to have been a serious design flaw: its auto-deleveraging and settlement of bankrupt positions unfolded slowly enough that for a short time, users were depositing top-ups at the same time as they were being deleveraged/liquidated. So this new money, which depositors likely thought would save them from liquidation, instead went directly to their winning counterparties.
This created massive anger and confusion (though it seems Backpack will be manually rectifying the situation). The kicker? Backpack was cofounded by Can Sun, the former FTX lead counsel who invented the “margin lending” fiction that Sam Bankman-Fried used to try and hide his embezzlement. Oh, and they maybe offered KFC meal vouchers to liquidated users, which is spiritually true whether or not it’s factually true, if you know what I mean.
Subscribe
Again, this is just a quick pass at some highlights. Austin Campbell and I are doing a more nuanced deep dive at Zero In next week, so go over there and sign up if you’re interested.
No comments yet