Bitcoin plunged suddenly Friday after President Donald Trump announced a 100% tariff on goods from China, setting off the largest liquidation event in the crypto market’s history.
But panicked investors weren’t responsible for the bulk of the damage. Instead, the real carnage was felt in the crypto derivatives market—where traders place large bets using borrowed funds, called leverage, and risk getting rekt, or forcibly liquidated, when things go very wrong.
Sudden price movements, like the one Friday or ”Black Wednesday” in 2021, are particularly rough on traders using leverage to upsize the risk—and potential reward—of their perpetual futures contracts, or perps.
“The people who got liquidated weren’t retail investors,” Marcin Kazmierczak, co-founder of crypto oracle provider RedStone, told Decrypt. “They were crypto natives and traders using leverage on centralized exchanges. This was painful, but it wasn’t a retail flush. It was a leverage bloodbath.”
Bitcoin crash: What happened
The sudden drop in the price of Bitcoin on Friday is universally attributed to Trump’s tariff announcement, but that was merely the catalyst.
Bitcoin had been sitting above the $121,000 mark on Friday morning, but sank as low as $106,000 in the afternoon, according to crypto price aggregator CoinGecko.
Kazmierczak told Decrypt the timing of President Donald Trump’s announcement about proposed tariffs on China was key to the way things played out in crypto markets. That’s because the news started making the rounds after the closing bell in New York.
“When President Donald Trump announced 100% tariffs on China around 5 p.m. Eastern Time on Friday, October 10, crypto markets became the sole outlet for global investors to express their shock,” he said.
It was that initial shock that eventually led to the liquidation of $19 billion worth of leveraged positions in the crypto market within 24 hours. Some analysts estimate the damage was far greater—likely upwards of $30 billion or more—and point to underreporting of liquidations from centralized exchanges.
Even still, at $19 billion, it’s the largest single-day liquidation event in the crypto market’s history—far larger than what took place following the collapse of Sam Bankman-Fried’s FTX in 2022 or the COVID-induced market crash in 2020.
The reason why is the recent explosion of the crypto-based perpetual futures market.
How perps work
A perp contract is a little different from traditional options with expiry dates. Traders still use them to bet on future price movements, using longs to bet the price will go up and shorts to bet the price will go down. But this type of derivative allows traders to bet on the price of Bitcoin, or other assets, without an expiration date.
But that doesn’t mean traders can open a perp contract and keep it open indefinitely for free.
Exchanges use funding rates to keep the contract price close to Bitcoin’s spot price. So when a lot of traders are betting the price of BTC will increase, the funding rate flips positive and traders pay a small fee to traders betting the other way.
When the spot, or current, price of Bitcoin takes a big swing, it can force traders to liquidate their positions. And when you introduce leverage, the damage can be severe.
Leverage magnifies losses
When traders use leverage, they’re essentially borrowing money from an exchange to increase the size of their position. So a trader who is certain Bitcoin will increase in price could use $100 to open a $1,000 position with 10x leverage from an exchange.
If Bitcoin were to rise just 5%, that trader would be sitting on 50% paper profits. But if Bitcoin falls too far—enough to wipe out the $100 margin used to open the contract—then the exchange will force the position to close with a liquidation.
Liquidations occur when an exchange closes positions that fall too far into the red. Investors trading with leverage can be issued margin calls, which are warnings that an exchange may need to liquidate their position. But when the price takes a wild swing, traders aren’t left with much time to add more margin to cover the losses.
If prices fall fast enough, they can set off a cascade of liquidations. And that’s exactly what happened on Friday.
“The flash crash in token prices caused collateral values to plummet momentarily, triggering massive liquidation cascades,” Kazmierczak said. “Roughly 1.6 million traders saw their positions evaporate. Even positions that might have survived a more gradual price decline were wiped out in seconds as exchanges’ liquidation engines worked through overleveraged positions.”
Bitcoin is currently trading for around $115,000, up roughly 8.5% since the crash, which reinforces the view that investors remain broadly optimistic during what’s been a historic bull run.
The problem? Leveraged trading isn’t going away; it’s likely only going to get larger as exchanges such as Hyperliquid, which specialize in perpetual futures, grow in popularity. At the moment, there’s over $75 billion in open interest across the Bitcoin futures market.
