The cascading liquidations caused by extreme leverage using altcoins as collateral are 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 investors pledging altcoins to borrow stablecoins.

There is a myth in ancient Greek mythology about 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, complacent, flew too high, causing the wax on his wings to melt in the sun, leading to his death in the sea.

To make 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 that emerged before the powder keg

On October 11, 2025, the market was hit by a sudden macroeconomic headwind: Trump announced that 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-haven assets like the US dollar and gold.

For a crypto market that has already accumulated a large amount of leverage and vulnerable positions, this is tantamount to throwing a spark into a powder keg.

First Perspective: Market Makers’ (MM) “Neutral Strategy” Is Unbalanced

Market makers play a key role in providing liquidity in the market. In theory, they earn the bid-ask spread through a "market neutral strategy" (holding both long and short positions to hedge risk), rather than betting on a unilateral market trend.

• Pursuit of capital efficiency: Market makers don't invest millions of dollars in real cash to create liquidity for every trading pair. Instead, 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, if a person stakes $1 million worth of an altcoin, with a 50% collateralization ratio, they can borrow $500,000 in stablecoins.
• Hidden risk exposure: In this model, although market makers may be “neutral” in the contract market, their balance sheets are not. Their collateralized pledged positions themselves are a huge risk point.
• The detonation process of 10.11:

Market mutation: Trump’s tariff news triggered a panic drop in the market, and the prices of all altcoins plummeted following Bitcoin and Ethereum.

• Collateral value shrinks: The value of altcoins pledged by market makers has dropped rapidly, causing the health of their pledged positions to deteriorate sharply, approaching the liquidation line.
• Double pressure: At the same time, their market-making positions in the contract market (which may include some long orders to maintain balance) are also facing losses or even margin calls due to plummeting prices.
• Liquidation Initiation: When market makers are unable to add margin, the exchange’s liquidation system forcibly takes over their pledged altcoins and sells them at any cost in the spot market to repay the stablecoins they borrowed.
• A death spiral forms: Massive selling pressure in the spot market further drives down altcoin prices. Since futures prices closely track spot prices, this leads to another sharp drop in futures prices, which in turn triggers a collapse in more futures positions, both those held by market makers themselves and by other traders in the market.

This creates a vicious cycle: contract liquidation → price drop → collateral value decreases → collateral is liquidated by spot → spot price drops further → triggering more contract liquidations.

In the flash crash on October 11, the prices of many altcoins instantly dropped to zero or close to zero, precisely because the liquidity protection mechanism of market makers completely failed under the impact of the chain liquidation.

Second perspective: The dilemma of “holding coins and earning interest” for large altcoin holders

Altcoin traders (whales) face similar dilemmas as market makers, but their motivations and position structures are different.

• Sunk costs and impatient capital: Many large investors bought large amounts of altcoins in the middle and late stages of the 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, Bnsol).
• Seeking additional income: In order to make the deposited funds generate income, they took the same approach: staking the altcoins they held on exchanges or DeFi protocols, borrowing stablecoins, and then using these stablecoins to conduct contract transactions, short-term speculation, or invest in other projects.
• Long-standing unhealthy positions: After a long period of sideways or downward movement, the health of many large investors' pledged positions has long been in a "sub-healthy" state. They may have become accustomed to hovering on the edge of the liquidation line, maintaining their positions through small margin calls.

The last straw for 10.11:

• External shocks: The general decline triggered by the tariff incident has put their already fragile positions at risk.
• The dual variable threat: They face a double threat from two core variables:

1. Losses in contract positions: The contract orders (most likely long orders) they opened with the borrowed stablecoins are losing money rapidly.
2. A plunge in collateral value: This is even more fatal. Even if their contract positions can hold up for the time being, the collateral that serves as the foundation is being eroded. Once the collateral value falls below a certain threshold, the entire pledged position will be liquidated regardless of whether the contract position is profitable or not.

• Same spiral, different protagonists: When liquidations occur, the mechanism is identical to that of market makers: contract positions are closed in the futures market, while the collateralized altcoins are sold in the spot market. Each liquidation by a major trader becomes a bombshell that hits 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 crypto market crash on October 11th was ostensibly driven by macroeconomic news, but the underlying cause was the extreme leverage accumulated within the market, using high-risk altcoins as collateral. This model tightly linked the spot and futures markets through collateralized lending, creating a highly fragile system.

• Resonance of risks: Risks in a single market (such as contract losses) will be quickly transmitted and amplified to another market (spot selling), and vice versa, forming a powerful resonance effect.
• Evaporation of liquidity: Under the stampede of serial liquidations, buying in the altcoin spot market was instantly drained, causing prices to plummet, or even temporarily drop to zero.

Under the current crypto market structure, even market makers and large long-term coin holders without directional risk will put themselves and the entire market on the brink of systemic collapse due to the pursuit of extreme capital efficiency and leveraged returns. A seemingly unrelated external shock is enough to trigger the entire avalanche.