Bits + Bips: Crypto Had Its Reset. Will It Go to New Highs Now? - Ep. 924

Unknown Source October 14, 2025 66 min

artificial-intelligence investment meta

67 Companies

85 Key Quotes

2 Topics

🎯 Summary

Bits + Bips: Crypto Had Its Reset. Will It Go to New Highs Now? - Ep. 924 Summary

This episode of Bits + Bips focuses almost entirely on dissecting the extreme market volatility and cascading liquidations that occurred on Friday, triggered by external macroeconomic news (Trump’s tariff threat) and exacerbated by internal crypto market microstructure flaws, particularly within the perpetual futures (perps) market.

1. Focus Area: The primary focus was a deep dive into the crypto market microstructure failure during the recent flash crash, specifically analyzing the role of perpetual futures, auto-deleveraging (ADL), oracles, and liquidity withdrawal on centralized exchanges (CEXs) like Binance, and decentralized perps platforms like Hyperliquid.

2. Key Technical Insights:

Perps Vulnerability: The event highlighted that perpetual futures, often used for hedging, can fail catastrophically during stress events due to forced liquidations (often algorithmic) that precede market maker reactions, leading to a “perfect storm.”
Oracle Dependency Risk: The second wave of liquidations appeared linked to the de-pegging of assets like USDE and WBETH, suggesting that reliance on specific exchange spot order books (rather than robust, median-based third-party oracles) for margin and mark price calculations created exploitable vulnerabilities.
Phantom Liquidity: The episode drew parallels to the 2011 US equity flash crash, noting that automated market-making systems can create “phantom liquidity” that vanishes instantly during high volatility, leading to bid-ask spreads widening to 30% or more.

3. Market/Investment Angle:

Counterparty/Exchange Risk: The event served as a stark reminder of counterparty risk and exchange risk, forcing market participants to re-evaluate the safety of using perps for hedging, especially for delta-neutral strategies.
Liquidity Assessment: Investors must become far more discerning about order book depth and true liquidity, especially for altcoins, recognizing that market makers automatically withdraw quotes during uncertainty.
Winners and Losers: The discussion implied that market makers who managed risk well (like GSR, by not being overly reliant on perps) and potentially actors who exploited the microstructure gap emerged as relative winners, while leveraged long/short traders suffered massive losses.

4. Notable Companies/People:

Hyperliquid: A decentralized perp platform that reportedly suffered significant liquidations (estimated $192M in losses/exploits) during the event.
Binance: Central to the discussion due to its use of internal spot prices for collateral valuation and an announced oracle adjustment that coincided suspiciously with the crash.
GSR (Carlos Guzman): Representing a major market maker, emphasizing the importance of robust, multi-venue risk management beyond simple perp positions.
AllLayer (YQ): Provided a detailed timeline analysis suggesting the possibility of a coordinated attack exploiting the known oracle adjustment timeline on Binance.

5. Regulatory/Policy Discussion:

The discussion referenced the US Regulation National Market System (Reg NMS) from 2007, which aimed to increase competition in US equities but was later criticized for contributing to phantom liquidity issues seen in the 2011 flash crash—drawing a direct historical parallel to current crypto market structure debates.

6. Future Implications:

The industry needs to move towards more resilient risk management frameworks that do not rely solely on leveraged perps for hedging.
There is a critical need for more transparent and robust oracle mechanisms, especially on CEXs, to prevent market microstructure hacks that exploit known pricing dependencies.
The market is expected to “heal and move on,” but participants must learn from this “reset” regarding liquidity and leverage accumulation.

7. Target Audience: Crypto professionals, institutional investors, market makers, risk managers, and developers focused on DeFi infrastructure and CEX operations.

🏢 Companies Mentioned

Coinbase ✅ exchange

Aave ✅ DeFi protocol

Compound ✅ DeFi protocol

As I ✅ unknown

Puerto Rican ✅ unknown

Can I ✅ unknown

Taco Trump ✅ unknown

North Jersey ✅ unknown

And FINRA ✅ unknown

The NASD ✅ unknown

Now Chris ✅ unknown

Term Capital Management ✅ unknown

And Chris ✅ unknown

So Tradify ✅ unknown

The CFTC ✅ unknown

💬 Key Insights

"The unfortunate part is that their users were carried out and liquidated at the exact worst time, and it wasn't in their control. That's what makes this terrifying."

Impact Score: 10

"Beyond that, we also have something called this, I'm not sure whether you guys are doing some DeFi protocols. We have something called looping. Looping to get extra yield. For example, we deposit USDE, get the USDE, and then we basically, we can lend USDE and then we deposit USDE, get more USD. And we do this kind of looping to get this extra APY. It's not like this kind of perpetual. It's a lending, but as you can see, we can get as much as high as sort of three or five X leverage."

Impact Score: 10

"One of the root causes is really about this, we call cross-margin or unified account. So basically all your assets are treated as a cash when you open long or short positions. And that means, like, even you open like sort of a 1X long during this kind of market crash, right? It's basically everything in all your positions, all your sort of assets in your unified account gone, even 1X."

Impact Score: 10

"There has been no self-regulatory organization. There's no incentive for anyone to build one. They need to do that though, because if this were to happen in the US who had an unregulated jurisdiction under a different administration, and if it returned, that's just lost a lot of money, then you'd have the heavy hand of government come down..."

Impact Score: 10

"But I think we've gone into a situation where exchanges offer a lot of leverage and there's potentially a lot of traders taking on a lot of risk that oftentimes, you know, doesn't really come back and invite them in a big way until there's potentially a big like black swan event, or what happens is a lot of traders are taking, you know, leverage in ways that individually might seem rational, but then when there's a big market crash, you get like a systemic risk where everything gets correlated because one person gets liquidated, but then that means like the price goes down and like someone else gets liquidated, and that ends up liquidating everyone..."

Impact Score: 10

"I mean, one, lack of liquidity or issues with liquidity. We've discussed some of the break-the-glass scenarios that exchanges have to go through and problems there. I want to just briefly touch on leverage too, because all of this was, I mean, that was sort of the stack of dry leaves or sticks that was able to be set ablaze."

Impact Score: 10

📊 Topics

#artificialintelligence 69 #investment 2