The Crypto Market's October Crash: A Tale of Leverage and Liquidity
The crypto market's October 10 flash crash was a tumultuous event that left many investors reeling. Four months later, the industry is still grappling with the aftermath, debating the exact cause of the crash and its long-term implications. At the center of this controversy is Star Xu, the founder of OKX, one of the largest crypto exchanges, who has pointed the finger at Binance for the crash.
According to Xu, the crash was not a result of a single event or a technical glitch, but rather a consequence of irresponsible yield campaigns and leveraged trading practices. He specifically highlighted the role of USDe, a yield-bearing token issued by Ethena, in creating a self-reinforcing leverage loop that amplified the market's volatility.
On that fateful day, President Trump's tariff escalation on China sent shockwaves through the macro markets, and the crypto market was already laden with leverage. The initial drop triggered a cascade of forced selling, resulting in approximately $19.16 billion in liquidations, including $16 billion from long bets. Xu argued that the crypto market's microstructure changed fundamentally after this event, and many industry participants believe the damage was more severe than the FTX collapse.
The crux of Xu's argument lies in the way USDe was marketed and used by traders. He claimed that users were encouraged to swap stablecoins like USDT and USDC into USDe for attractive yields, and then use USDe as collateral to borrow more stablecoins, creating a vicious cycle. This loop made yields appear safer than they were, but when volatility hit, the structure unwound rapidly, causing widespread damage across exchanges and users.
Xu's criticism of Binance's role in this debacle is twofold. He argues that Binance users were lured into converting USDT and USDC into USDe without sufficient emphasis on the underlying risks. From a user's perspective, trading with USDe seemed no different from trading with traditional stablecoins, but the actual risk profile was significantly higher.
When volatility struck, Xu claimed that the leverage loop amplified the initial market shock, turning a selloff into a full-blown wipeout. He believes that the cascading liquidations were not inevitable but were exacerbated by the structural leverage, leading to lasting damage across exchanges and users.
However, not everyone agrees with Xu's narrative. Haseeb Qureshi, a partner at Dragonfly, has called Xu's story 'ridiculous,' suggesting that it tries to simplify a complex event into a clear-cut villain. Qureshi argues that the crash did not unfold like a typical stablecoin blowup, where a single token failure spreads everywhere simultaneously.
Qureshi's alternative explanation is that macro headlines and market sentiment spooked an already levered market, leading to liquidations as liquidity dried up rapidly. He believes that the forced selling triggered a reflexive cycle, where lower prices drove more forced selling, with few natural buyers willing to step in during the chaos.
Binance, for its part, has attributed the Oct. 10 flash crash to a macro-driven selloff colliding with heavy leverage and vanishing liquidity, rejecting claims of a core trading-system failure. CZ, Binance's CEO, quote-tweeted Qureshi, suggesting that the timing of the events does not align with Dragonfly's investment relationship with OKX.
Despite the controversy, some market watchers offer a different perspective, attributing the selloff to excess leverage and weak underlying demand rather than a single platform or product. Seraphim Czecker, a former head of growth at Ethena Labs, tweeted that the markets crashed because the industry was overleveraged, and macro factors revealed the absence of sustainable organic bid.
As the industry continues to dissect the causes and consequences of the October crash, it is clear that the interplay between leverage, liquidity, and market sentiment played a pivotal role. The debate over who is to blame and what lessons can be learned from this event will likely persist, shaping the future of crypto trading and regulation.
