Crypto Markets Plunge Following Trump Declaration, Highlighting Systemic Risks
A recent market downturn, triggered by a statement from Donald Trump over a holiday weekend, exposed vulnerabilities within the 24/7 cryptocurrency trading ecosystem. The timing of the announcement – after US markets closed but before European and Asian markets opened – left a void of active buyers and sellers, exacerbating the impact. the sell-off was particularly severe for smaller cryptocurrencies, often referred to as “altcoins,” where leverage is high and liquidity is limited.
the core issue stemmed from the automated nature of many crypto trading systems. When collateral values dropped, algorithms automatically initiated sales, creating a cascading effect.This inherent mechanism, designed to keep markets continuously operational, ironically amplified volatility and accelerated losses.
“In principle, there is no liquidity for altcoins beyond 5-10% of the order portfolio, especially from buyers,” explained Zahir Ebticar, founder of Cryptophund SPLIT Capital. “When a product really starts to fall, and this happened with several products simultaneously, and market participants become desynchronized, the market practically dies.”
The impact was acutely felt on the Hyperliquid exchange, which experienced a $10 billion decline in dollar trading volume during the 24-hour period, according to Coinglass – a larger drop than its competitor Binance. Hyperliquid’s vulnerability was attributed to a high number of long-position liquidations coupled with insufficient liquidity to absorb them. This was compounded by its use of Automatic Reduction of Leverage (ADL),a risk management tool intended to prevent losses during extreme volatility.
Though, ADL proved controversial. While designed to automatically close profitable or heavily leveraged positions when liquidations strain insurance capacity, many participants argue it worsened the situation. Spencer halarn, a global head at GSR investment firm, noted, “This mechanism is not without complications, especially for participants with more complex portfolios.” He explained that quantitative liquidity suppliers could see profitable positions prematurely closed by ADL,disrupting portfolio balance and increasing overall market risk.
The situation also highlighted the role of entities like Hyperliquid Provider (HLP),a community-based liquidity pool separate from the exchange. HLP reportedly generated over $30 million in profit during the sell-off by taking advantage of liquidations and closing losing positions. This raises questions about the distribution of losses. “the question arises as to who should bear the loss – the exchange and a liquidity pool or the traders,” stated Tarun Chitra, co-founder of Gauntlet Networks.
Chitra further pointed out that the sell-off resembled a financial crisis more than a typical market correction, suggesting the involvement of forced sales beyond simple deleveraging. He noted that even some of the top 50 altcoins by market capitalization were considerably impacted,fueling speculation about potential bankruptcies or withdrawals.
While the market has begun to recover, the full extent of the damage remains unclear. Edward Chin, CEO of Crypto Hedge Fund Parataxis, anticipates further fallout.”I suspect that in the coming days and weeks we will hear about some funds that may have gone bankrupt, or about market participants who have suffered great losses.”
