Crypto’s biggest crash yet wasn't a failure, but proof the system works

October 10 brought a major crypto crash at a time of year that normally brings joy for traders. Bloomberg

Not a full month after one of the larger crypto liquidations, in which $3.62 billion in long positions was wiped out, the industry outdid itself. On the 10th of October, nearly $20 billion vanished. To make it sting even more, it happened in Uptober, the month crypto traders usually toast as their lucky charm.

Here is how it went down. Last week President Trump decided to lob another grenade across the Pacific, announcing via Truth Social a sweeping 100 per cent tariff on all Chinese imports effective from November 1, paired with new export controls on critical US software. It was the most aggressive move since the fragile May truce, marking a clear break from earlier rhetorical threats that had been watered down or delayed.

Normally, such pronouncements barely move the needle. But this one landed. No exceptions, practically no delays, and, crucially, it came alongside new export controls on critical US software, something the market read as a real policy shift rather than a bargaining tactic.

It suggested Washington was willing to weaponise tech and trade in tandem, coming just after China imposed sweeping export controls on rare earth minerals, a timing that made the US response look retaliatory and amplified the sense that the trade truce was truly over, a move that rattled every risk asset from equities to Bitcoin.

Traditional vs defi

Wall Street was able to close up shop and go home for the weekend. Crypto could not. It kept trading, turning the weekend into a live fire drill for the global market.

The set-up was classic hubris. Too many over-leveraged long bets, too many traders convinced the charts were their friends. I met the chief investment officer of one of our portfolio funds, Vadim Khramov from Edge Capital, for coffee soon after. The company's team summed up the situation with clarity.

This sell-off was unprecedented in scale, with many tokens declining by more than 50 per cent. Market liquidity was severely strained by the adjustment and the temporary depeg from the USDe stablecoin on Binance, which triggered a cascade of liquidations across smaller altcoins, or alternative coins, as margin requirements briefly shifted.

Despite the volatility, decentralised finance (DeFi) showed notable resilience. Smart contracts functioned as intended, liquidations executed efficiently, and no major depegs or bad debt appeared across major lending platforms. The roughly $100 billion DeFi lending market absorbed the shock impressively well.

Feedback among several funds of funds confirmed that institutional managers handled the event effectively, with no major liquidations or fund failures reported. The broader environment remained stable, with no evidence of systemic risk, bankruptcies or structural weaknesses across the industry.

The sharp deleveraging flushed out excess leverage, reduced near-term risk, and left the market on a healthier footing. While some market makers and smaller funds were affected, particularly those focused on small cap tokens or mean reversion strategies, the hedge fund industry as a whole weathered the storm well. The episode underscored both the growing maturity of institutional digital asset managers and the robustness of DeFi infrastructure under stress.”

Then came Binance. The world’s largest exchange saw its liquidity disappear for two minutes. Not thin out, disappear. Imagine the Intercontinental Exchange suddenly refusing to quote oil prices. For traders running cross exchange arbitrage, buying on one venue and selling on another to lock in a price gap, those two minutes felt like an eternity. They were trapped, unable to unwind trades or even hedge exposure.

The result was a pricing black hole that rippled across every exchange. Stop loss orders, automated triggers to limit losses, fired in rapid succession. Margin calls hit accounts that could not top up collateral fast enough, and the cascade fed on itself until liquidity returned.

What's to blame

The irony is that smart contracts held up better than human infrastructure. While centralised systems choked, DeFi kept ticking. Smart contracts did what they were designed to do: check, trigger, execute. No courtrooms, no judgment calls, just code. It was a quiet advertisement for what the technology is supposed to represent.

Warren Buffett once said that when the tide goes out you find out who has been swimming without a swimsuit. This time, a big chunk of the beach was naked. Roughly $500 billion in market cap disappeared. Small traders were hit hardest. Automatic position closures, when liquidated accounts instantly at the worst possible moment, offering no mercy and no appeal. Some exchanges buckled, and mean reversion bots kept feeding cash into a shredder.

The lesson? Crypto’s problem was not the technology but the infrastructure wrapped around it. The smart contracts and DeFi rails worked exactly as they should, but the centralised exchanges did not. One momentary failure from a too-big-to-fail venue like Binance was enough to drag the market down with it.

The incident proved again that while the code was sound, the human and operational layers still introduce fragility. Crypto’s plumbing needs constant work, and it probably always will. Flash crashes in global markets are nothing new, whether caused by leverage, algorithms or simple system faults. They are a reminder that progress in finance never fully escapes human error, it just changes its shape.

A flash crash is a sudden, sharp drop in asset prices that happens within seconds or minutes, usually followed by a rapid recovery. It occurs when liquidity temporarily vanishes – either because algorithms pull quotes, market makers pause trading, or systems misfire – creating a vacuum where small sell orders trigger outsized price swings.

Some examples. The US equity flash crash in 2010, when the Dow plunged nearly 1,000 points in minutes. Then there was the 2017 Ethereum flash crash on Coinbase, when ETH, Ethereum's native cryptocurrency, briefly dropped from about $320 to 10 cents due to a cascade of automated liquidations.

Yet the data puts the moment in perspective. This was the largest liquidation in nominal terms, but only just, the top three events, including April and May 2021, all sit within a whisker of each other when scaled to total market value. In percentage terms, this shake-out ranked first at about 0.47 per cent of global crypto market cap, barely ahead of the 0.45 per cent and 0.44 per cent events of 2021. In other words, this is par for the course for a maturing market. Bigger base, bigger ripples.

Far from a sign of fragility, it shows how much the ecosystem has grown. The same proportion of pain now translates into far larger nominal sums. These episodes will keep happening, not because crypto is broken, but because it is functioning as a true market, one that now moves with global macro events rather than its own internal drama. The more capital, infrastructure, and participants the space attracts, the more natural these occasional wash-outs become. They are a feature, not a flaw, and a sign of how far the asset class has come.

Yevgeny Bebnev is chief investment officer at Pelican Investments