By: Mark Hays
If you aren’t a part of the cryptoverse, you may have missed the unprecedented crypto crash that wiped out billions in investor value in a single weekend this month. Crypto investors lost an estimated $380 billion in a few days. That is like erasing the annual $357 billion gross domestic product of South Carolina.
It is an enormous loss for crypto investors, and it highlights some of the crypto markets’ biggest built-in flaws. The trading rules are rigged for the house, the little guy gets easily fleeced, and the value of hyper-volatile crypto tokens can evaporate in a flash crash.
This month’s free fall pounded crypto investors, especially smaller players. But since crypto remains a niche and speculative casino-like market, most people were not impacted. That is about to change. The crypto-controlled Congress and the crypto-corrupt administration are trying to make big changes that would mean that the next crash could wipe out Wall Street, Main Street, and your retirement savings.
Crypto Alt-Coins Tank
Trump’s latest tariff announcement caused a market nosedive that was felt far more sharply on crypto markets. Bitcoin prices dropped 13 percent in a day. But the so-called Alt-Coins — the most speculative tokens and memecoins — fell by 80 percent. This was the biggest 24-hour wipeout in crypto history, and it was nineteen times larger than the 2022 FTX collapse.
It’s hard to know exactly how many investors were affected, but one industry estimate said over 1.6 million traders had their positions liquidated. Market downturns occur, but the severity of this crypto crash was not entirely an accident — a bubble had been built that was waiting to pop. The unique structures and practices that drove cascading losses are a feature not a bug of crypto trading markets.
Leveraged Bets Go Sideways
The crypto industry has fostered a casino-like culture where both large and small investors alike are encouraged to use borrowed money to place big bets on highly volatile crypto assets. Leveraged trading allows investors to place far larger bets with bigger payouts. When the bets pay off, you pay off the lender and pocket the winnings; if the bets go sour, you have to repay the lender for the money you gambled away. It is already a risky part of traditional finance (as was demonstrated during the financial crisis when leveraged investments on subprime mortgages went belly up).
But crypto leverage is often supersized. Crypto traders brag about leveraged bets of 10, 40, or 100 times the size of their original investment. Platforms encourage investors to borrow money to bet on crypto. By July 2025, lending for these crypto bets had grown to $53 billion. It was even higher when the crash hit on October 10. Leverage supercharges price drops and volatility. When the bubbles burst, leveraged investors don’t just lose their stake, they have to repay their loans, compounding the pain.
Multiplying Leverage through Liquid Staking
One unique crypto practice magnifies this highly leveraged stew. Platforms allow investors to stake crypto coins into a pool that can be used as collateral for loans, but these stakes are often matched with a ‘synthetic’ version of the same coin (known as liquid staking). Users can trade or borrow against these synthetic coins. This meant that the tokens were being double counted as collateral for traders’ bets. When markets tanked, the paper collateral turned out to be worth less than expected, meaning that investors owed even more on their leveraged losses.
Perpetual Trading, Perpetual Futures, Perpetual Peril
Traditional markets open and close, creating a natural brake on collapsing prices. But in this case, crypto’s 24/7 trading model inflated the bubble and removed the market closure firebreak that can calm markets. The trading of perpetual crypto futures added more risk. Regular futures contracts are just bets between two traders on the expected future price of an asset. These contracts have a fixed expiration (like a 9-month corn contract) and require the two parties to settle their trade before betting again. But perpetual futures allow traders to effectively keep a running tab open on their position, allowing them to tweak their bets as asset prices change. Some investors love these so-called perps, but they inflate asset bubbles and just encourage traders to take on more risk as they constantly try to beat the market.
Automatic Deleveraging Creates Cascading Price Collapses
The crypto platforms that provide or facilitate loans to investors who make leveraged bets will liquidate these traders’ assets to recoup their loan losses when markets take a nosedive. Platforms have insurance to cover these losses, but market free-falls can quickly outpace insurance coverage, and platforms often turn to automatic deleveraging to staunch the bleeding.
When lots of crypto traders lose their bets or try to sell off assets in declining markets, crypto prices will rapidly decline. Platforms are forced to sell borrower’s assets at a loss, threatening their own bottom line. If these fire sales are not enough to shield the platform from losses it will initiate automatic deleveraging, which forces traders with winning bets to sell off a portion of their earnings to help make the platform whole. Many liquidations during this crash were the result of automatic deleveraging. This seemed unfair to many traders, but it is the kind of fine-print practice that is prevalent on many platforms that harms users.
Common Crypto Industry Practices Facilitate Market Manipulation
The lack of crypto market transparency often enables market manipulation that benefits big crypto investors (known as whales), who seem to profit handsomely even as small investors (often known as krill) get fleeced. This certainly seemed to be true in this crash.
Hours before Trump’s tariff announcement, a few whales placed huge bets saying crypto prices would fall. Then, as markets tumbled, some unknown trader or traders sold massive amounts of a few tokens used heavily for trading and leverage on Binance and other platforms. This sell-off triggered Binance’s pricing oracle software into tanking its estimation of the price of these assets, precipitating even steeper price declines — expanding the gap between market prices and short positions taken against the market.
All told, hours after the market contraction, these whales netted $160 million on their bets. Some industry analysts believe that these traders (or maybe others) had insider information that allowed them to take that short position. Industry skullduggery aside, these tales expose two big crypto vulnerabilities.
First, unlike the rules for traditional markets, nothing requires crypto platforms to provide integrated prices so that investors can see the same prices for the same tokens at the same time on different platforms. Instead, platform oracle manipulations and other market manipulations are not uncommon occurrences in crypto that cheat investors.
Second, the markets allow crypto traders to use pseudonymous wallets that makes the markets more opaque and can conceal destabilizing positions held by big, secret whales that can distort markets for personal profit with little accountability.
Pending Crypto Legislation Will Likely Fail to Address Crypto’s Built-In Flaws
Crypto enthusiasts are already trying to brush off this crash as a mere market correction. But this crash, like others before it, happened because of major vulnerabilities in the crypto industry that are a built-in feature by design of its business model. These include:
· A highly speculative asset base with little underlying value;
· Highly-leveraged trading magnified by unique practices like liquid staking turn downturns into nosedives;
· Round-the-clock trading and perpetual futures build bubbles and accelerate price collapses. Self-serving automatic deleveraging protects platforms at the expense of investors; and,
· Built-in price opacity fuels market manipulation.
Traditional financial regulations could have made a real difference during this crash and would have saved investors significant money. But the crypto industry claims comparable investor protection and market integrity rules just aren’t compatible with crypto. Any effort to implement effective guardrails would inhibit its purportedly innovative business model. There is nothing innovative about exposing users to fraud, deception, abuse, and losses; such behavior is pure profiteering with a long and disreputable history.
Now the crypto industry and its allies in Congress and the Trump administration want to lock in these deeply flawed practices and expose mainstream financial markets to these same speculative assets as well as risky practices and protocols. This latest crash gives us just a taste of what’s in store if these legislative and regulatory giveaways come to pass. Unless Congress stands up to industry pressure, the coming crypto chaos will reverberate across the economy and harm us all.