The scale of the liquidation event
Friday’s crypto market sell-off triggered what Bitwise portfolio manager Jonathan Man described as the worst liquidation event in crypto history. More than $20 billion was wiped out as liquidity vanished and forced deleveraging took hold across markets. The situation escalated rapidly, with bitcoin falling 13% from peak to trough in just a single hour.
Long-tail tokens experienced even steeper declines. Man noted that ATOM “fell to virtually zero” on some trading venues before eventually rebounding. The sheer speed of the decline caught many participants off guard, creating a cascade of forced selling that fed on itself.
How perpetual futures contributed to the problem
The structure of perpetual futures contracts played a significant role in amplifying the volatility. These “perps” are cash-settled contracts with no expiry that mirror spot prices through funding payments rather than physical delivery. The problem arises because profits and losses net against a shared margin pool. When stress hits the system, venues need to reallocate exposure quickly to keep their books balanced.
Man estimated that roughly $65 billion in open interest was erased during the sell-off, resetting positioning to levels last seen in July. But he argued the headline numbers mattered less than what was happening in the market plumbing.
Emergency measures and safety valves
When uncertainty spikes, liquidity providers typically widen their quotes or step back entirely to manage inventory and capital. Organic liquidations stop clearing at bankruptcy prices, and venues turn to emergency tools. During Friday’s turmoil, exchanges leaned heavily on their safety valves.
Auto-deleveraging kicked in at some venues, forcibly closing part of profitable counter-positions when there wasn’t enough cash on the losing side to pay winners. This mechanism, while disruptive, prevented complete system failure. Liquidity vaults also played a crucial role in absorbing distressed flow.
Man specifically mentioned Hyperliquid’s HLP, which “had an extremely profitable day” by buying at deep discounts and selling into price spikes.
Centralized vs decentralized market differences
The impact varied significantly between centralized and decentralized venues. Centralized exchanges saw the most dramatic dislocations as order books thinned, which explains why long-tail tokens broke harder than bitcoin and ether.
DeFi liquidations remained relatively muted for two main reasons. Major lending protocols tend to accept blue-chip collateral like BTC and ETH, providing more stability. Additionally, protocols like Aave and Morpho “hardcoded USDe’s price to $1,” which limited cascade risk.
Though USDe remained solvent, it traded around $0.65 on centralized exchanges amid illiquidity, leaving users who posted it as margin on those venues vulnerable to liquidation.
Hidden risks and operational challenges
Beyond directional traders, Man highlighted hidden exposures for market-neutral funds. He noted that the real risks on days like Friday are operational—algorithms continuing to run, exchanges staying operational, accurate price marks, and the ability to move margin and execute hedges on time.
He checked in with several managers who reported they were fine, but said he wouldn’t be surprised if “some c-tier trading teams got carried out.” The unusually wide dispersion across venues also created challenges, with $300-plus spreads appearing at times between Binance and Hyperliquid on ETH-USD pairs.
Despite the chaos, prices eventually recovered from extreme lows, and the positioning flush created opportunities for traders with available capital. With open interest down sharply, markets entered the weekend on firmer footing than the day before, though perhaps with a renewed appreciation for the fragility of crypto market structure during stress events.
