Author: Danny; Source: X, @agintender Cascading liquidations triggered by extreme leverage using altcoins as collateral is a systemic risk triggered by external shocks when the market is structurally fragile. This article will analyze the underlying mechanisms from the perspective of market makers and large traders pledging altcoins to borrow stablecoins. Ancient Greek mythology tells the story of a man who died chasing the sun. Icarus is a young man in Greek mythology who died chasing the sun. He and his father, Daedalus, were imprisoned by the King of Crete. Daedalus crafted two pairs of wings from wax and feathers, allowing him and his son to escape the island. Daedalus warned his son not to fly too high, but Icarus, carried away by his own pride, flew too high, causing the wax on his wings to melt in the sun, leading to his death in the sea. To use an analogy, wings are leverage in the financial world, and flying too high is a sin. The catalyst for the October 11th crash: a macroeconomic "black swan" event appearing before a powder keg. On October 11, 2025, the market was hit by a sudden macroeconomic headwind: Trump announced he would impose high tariffs on Chinese goods. This news instantly ignited risk aversion in global markets, causing investors to sell risky assets like stocks and cryptocurrencies and flock to safe havens like the US dollar and gold. For the crypto market, which had already accumulated significant leverage and vulnerable positions, this was like a spark in a powder keg. Market makers (MMs) play a key role in providing liquidity. In theory, they profit from the bid-ask spread through a "market-neutral strategy" (holding both long and short positions to hedge risk) rather than betting on unilateral market trends. Pursuit of Capital Efficiency: Market makers don't invest millions of dollars in real cash to provide liquidity for every trading pair. Exchanges allow them to stake their crypto assets (including a wide range of altcoins) to borrow stablecoins (such as USDT and USDC), which they then use to execute market-making strategies. For example, pledging $1 million worth of an altcoin with a 50% collateralization ratio could yield $500,000 in stablecoins. Hidden Risk Exposure: Under this model, while market makers may be "neutral" in the futures market, their balance sheets are not. Their collateralized positions themselves represent a significant risk point. The October 11th Incident: Sudden Market Change: Trump's tariff announcement triggered a panic sell-off, sending all altcoin prices plummeting along with Bitcoin and Ethereum. Declining Collateral Value: The value of the altcoins pledged by market makers plummeted, causing the health of their collateralized positions to deteriorate dramatically, pushing them close to liquidation levels. Double Pressure: Meanwhile, their market-making positions in the futures market (which may include some long positions to maintain balance) also face losses or even liquidation due to plummeting prices. Liquidation Triggers: When market makers are unable to replenish margin, the exchange's liquidation system forcibly seizes their pledged altcoins and sells them at any cost in the spot market to repay the borrowed stablecoins. Death Spiral: Massive selling pressure in the spot market further depresses altcoin prices. Because futures prices closely track spot prices, this directly leads to another sharp drop in futures prices, triggering even more liquidations, including those of the market makers themselves and other traders in the market. This creates a vicious cycle: contract liquidation → price drop → collateral value decreases → collateral is liquidated by the spot market → spot price drops further → triggering more contract liquidations. During the October 11th flash crash, the prices of many altcoins instantly plummeted to zero or near zero, precisely because the market maker's liquidity protection mechanism completely failed under the impact of the cascading liquidations. A Second Perspective: The "Holding for Interest" Dilemma of Major Altcoin Holders Major altcoin holders (whales) face similar predicaments as market makers, but their initial motivations and position structures differ. Sunk Costs and Impatient Capital: Many large investors invested heavily in altcoins in the mid-to-late bull market, anticipating a hundredfold increase. However, the market has failed to meet their expectations, leaving their funds locked up in these illiquid assets for a long time (e.g., Wbeth and Bnsol). Seeking Additional Yield: To generate returns on their stashed funds, they resorted to the same strategy: staking their altcoin holdings on exchanges or DeFi protocols, borrowing stablecoins, and then using these stablecoins for contract trading, short-term speculation, or investing in other projects. Already Unhealthy Positions: After a prolonged period of sideways or declining prices, the health of many large investors' staked positions has long been in a sub-healthy state. They may have become accustomed to teetering on the edge of the liquidation line, maintaining their positions through small margin calls.
The last straw on October 11
External shock: The general decline triggered by the tariff incident has made their already fragile positions precarious.
The threat of two variables: They are facing a pincer attack from two core variables:
Losses in contract positions: The contract orders (most likely long orders) they opened with the borrowed stablecoins are rapidly losing money.
Plummeting Collateral Value: This is even more devastating. Even if their futures positions can hold up for now, the collateral that forms the foundation is being eroded. Once the collateral value falls below a certain threshold, the entire staked position will be liquidated, regardless of whether the futures position is profitable or not.
Same Spiral, Different Protagonists: When liquidations occur, the mechanism is identical to that of market makers: futures positions are liquidated in the futures market, while the collateralized altcoins are sold off in the spot market. Each liquidation by a major trader becomes a devastating bombshell that crashes the market, accelerating the price collapse and triggering the next major trader's liquidation. This is equivalent to two liquidation lines occurring simultaneously: one by the market maker's arbitrage bots, and the other by the liquidation engine. Conclusion: A Structural Avalanche Triggered by Extreme Leverage The October 11th crypto market crash was ostensibly driven by macroeconomic news, but the underlying cause lay in the extreme leverage accumulated within the market, collateralized by high-risk altcoins. This model tightly ties the spot and futures markets together through collateralized lending, creating a highly fragile system. Risk Resonance: Risks in one market (such as futures losses) can quickly transmit and amplify to another market (spot sell-offs), and vice versa, creating a powerful resonance effect.
Evaporation of Liquidity: Amidst the wave of liquidations, buying in the altcoin spot market was instantly drained, causing prices to plummet, even briefly dropping to zero.
Under the current crypto market structure, even market makers and large long-term holders without directional risk can put themselves and the entire market on the brink of systemic collapse in their pursuit of extreme capital efficiency and leveraged returns. A seemingly unrelated external shock can be enough to trigger an entire avalanche.
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