Friday’s $20 Billion Crypto Market Meltdown: Insights from a Bitwise Portfolio Manager
In a recent post, Jonathan Man, a portfolio manager at Bitwise, shed light on what he termed the worst liquidation event in crypto history. On Friday, over $20 billion evaporated from the market as liquidity dwindled, forcing deleveraging to take hold.
During the sell-off, bitcoin experienced a staggering 13% drop within just one hour, while certain long-tail tokens plummeted even further, with some nearing zero before recovering. Man highlighted that this event led to an elimination of approximately $65 billion in open interest, reverting market positioning to levels not seen since July.
Key Issues During the Meltdown
Man emphasized that the numbers behind the liquidation matter less than the inner workings of the machinery driving the markets. As uncertainty surged, liquidity providers pulled back, widening quotes and leading to failed organic liquidations at prices considered bankruptcy levels. As a result, exchanges resorted to emergency measures to maintain stability.
Centralized exchanges were particularly impacted, demonstrating significant dislocations. The phenomenon of auto-deleveraging came into play at some venues, wherein profitable counter-positions were forcefully closed when losing positions lacked sufficient cash to compensate winners. In contrast, DeFi platforms demonstrated resilience, with major lending protocols relying on stable blue-chip collateral, which mitigated cascading liquidations.
Specific Dynamics of Decentralized Finance
Despite USDe encountering challenges in centralized exchanges—trading around $0.65—Man noted that it remained solvent and effectively managed risks. He pointed out that the actual threats stemmed from operational factors beyond mere market direction, including the functioning of algorithms, system uptime, accurate pricing, and the timeliness of margin movements and hedges.
Traders across various platforms experienced disparate outcomes, with some enduring significant losses while others capitalized on the market’s volatility. The divergence in recovery rates and racketing spreads—often exceeding $300—between platforms showcased the extent of the market’s turmoil.
Market Recovery and Future Outlook
Despite the chaos, prices rebounded from their lows, leading to opportunities for traders with capital. Although open interest decreased substantially, Man pointed out that this positioning flush set the market on a steadier course as the weekend approached. He highlighted the silver lining that resulted from the necessary adjustments, suggesting that the market may emerge on firmer footing in the aftermath of such a severe event.
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