Crypto’s $20B Leverage Washout: October 2025 Reckoning

The spark for the October 10 carnage was a potent mix of macro triggers: trade tensions and tariff headlines drove a risk-off cascade that caught even seasoned participants off guard. Within a single hour, Bitcoin plummeted by approximately 13%, while altcoins experienced even more severe slippage. Some tokens, like ATOM, briefly plunged to near-zero on illiquid exchanges before staging partial recoveries. Market-wide, more than $20 billion in leveraged positions were liquidated across both centralized and decentralized platforms, making it, as Bitwise portfolio manager Jonathan Man noted, the largest blowout in crypto’s history.

This was not a slow bleed but a rapid evaporation of weeks of bullish build-up. Sky-high open interest disappeared from the crypto market overnight, with over $65 billion vanishing from the system. The event reset market positioning to where it stood months prior, demonstrating how quickly leverage can amplify market moves. The damage was particularly severe in long-tail tokens on centralized exchanges, where cascading liquidations created a domino effect that overwhelmed market structure.

Contrary to popular assumption, the primary victims weren’t retail investors. As Wolf of All Streets’ Scott Melker explained, echoing the consensus of several analysts: “The people who got liquidated weren’t retail investors. They were crypto natives and traders using leverage on decentralized exchanges. As always… This was painful, but it wasn’t a retail flush. It was a leverage washout of our most ardent believers.” The data supports this assessment, showing that new retail flows are increasingly buying spot positions or large-cap ETFs, largely immune to internal DeFi leverage mechanics.

The traders left holding the bag were those running high-leverage perpetuals—crypto veterans, not first-timers. These sophisticated market participants, who typically understand risk management better than retail investors, found themselves caught in a perfect storm of market forces. The event served as a stark reminder that in leveraged trading, experience doesn’t necessarily provide immunity from market ruthlessness.

The answer to why the damage reached such extreme proportions lies in market structure, as detailed in Jonathan Man’s post-mortem analysis. Perpetual futures (“perps”) are zero-sum instruments: when the losers owe more than they can pay, the entire system becomes stressed. Under ordinary conditions, margin calls and liquidations are absorbed naturally by the market. However, as volatility spiked during the October 10 event, liquidity providers pulled back, creating dangerously thin order books.

This liquidity vacuum led to disproportionate price moves in altcoins, with auto-deleveraging (ADL) mechanisms shutting out even profitable traders in some cases. Certain platforms, like Hyperliquid, benefited through on-chain liquidity pools, capitalizing on forced sales while traders saw positions disappear at a fraction of their value. By the end of the day, even sophisticated market-neutral strategies were caught off guard as operational risk and slow-moving collateral led to sudden losses across the entire crypto market.

The October reckoning revealed stark differences between centralized and decentralized finance infrastructures. Centralized exchanges bore the brunt of cascading liquidations, particularly in long-tail tokens, while DeFi weathered the storm better due to strict collateral standards and hardcoded price mechanisms. Protocols like Aave and Morpho required high-quality collateral and protected stablecoin prices, effectively limiting the risk of a DeFi-wide death spiral.

Despite this relative resilience, there were still significant pain points in the DeFi space. The stablecoin USDe dropped to $0.65 on some centralized venues, and anyone using it for margin was swiftly liquidated. The event created rare arbitrage opportunities for nimble professionals, with wide spreads sometimes reaching $300 or more between exchanges. However, the broader takeaway remains sobering: operational excellence and liquidity management, not just market direction, determined who weathered the storm.

Despite the massive $20 billion vaporization from leveraged positions, spot buying remained remarkably steady throughout the turmoil. Prices recovered from their extremes, and leverage’s excesses were forcibly purged from the ecosystem. As Bitwise CEO Hunter Horsley commented: “One of the biggest liquidation events in Bitcoin’s history — And it’s down only 15%. Remarkable sign of strength for BTC. Nothing stops this train.”

The October 2025 event serves as a crucial reminder that crypto’s inherent volatility and growing macro sensitivity mean such purges are both inevitable and healthy for market development. They restore balance and remind every participant that leverage isn’t just risky—it’s ruthless. The fact that Bitcoin recovered relatively quickly from such a significant leverage washout suggests underlying strength in the spot market, even as the perpetual futures market underwent its most severe stress test to date.