Is Bitcoin Dropping Because of Exchange Liquidation Cascades?
The cryptocurrency market experienced a significant downturn in October 2025, and many investors have been asking whether exchange liquidation cascades played a central role in Bitcoin’s decline. To understand this question fully, we need to examine what happened during the crash, the underlying market conditions that made it possible, and how liquidation cascades actually work in the crypto ecosystem.
What Happened in October 2025
On Friday, October 10, 2025, U.S. President Donald Trump posted a tweet that sent shockwaves through global financial markets. The tweet threatened a 100% tariff on all Chinese imports and announced new export controls on critical software. This announcement came after China had recently decided to restrict rare earth mineral exports, reigniting fears about an escalating U.S.-China trade war. Because cryptocurrency markets operate 24/7, unlike traditional stock markets that were closed for the weekend, the crypto market bore the immediate brunt of the panic selling that followed this announcement.[1]
However, the geopolitical news was not the only factor at play. The real story behind the October 2025 crypto crash involves a much deeper and more concerning market condition that had been building for months.
The Hidden Leverage Problem
Before the crash occurred, the cryptocurrency market was sitting on a powder keg of extreme leverage. On-chain data and exchange order book analysis from platforms like Glassnode and CoinGlass revealed a troubling picture. The aggregate open interest on major cryptocurrencies had skyrocketed to unprecedented levels, creating a significant divergence from the overall market capitalization.[1]
To put this in perspective, open interest on Bitcoin had grown by 374% since the start of 2025, while Solana’s open interest had surged by 205% during the same period.[1] Open interest represents the total number of outstanding derivative contracts that have not been settled. When open interest grows much faster than the underlying asset’s market capitalization, it signals that traders are using increasingly high levels of leverage to amplify their positions.
This means that many traders were not simply buying Bitcoin and holding it. Instead, they were borrowing money to buy Bitcoin, often through leveraged trading on cryptocurrency exchanges. Some of this leverage was hidden, meaning it was not immediately visible on the blockchain or in public market data. This created a fragile market structure where even a moderate price decline could trigger a cascade of forced liquidations.
Understanding Liquidation Cascades
A liquidation cascade occurs when falling prices force leveraged traders to close their positions, which causes prices to fall further, triggering more liquidations in a self-reinforcing cycle. Here is how this process works in practice.
When a trader uses leverage to buy Bitcoin, they put up a certain amount of their own money as collateral and borrow the rest from the exchange or a lending platform. The exchange sets a liquidation price, which is the price at which the trader’s collateral will no longer be sufficient to cover their borrowed funds. If Bitcoin’s price falls to that liquidation price, the exchange automatically closes the trader’s position and sells their Bitcoin to recover the borrowed funds.
When many traders have set their liquidation prices at similar levels, a sudden price drop can trigger a wave of automatic liquidations all at once. As these positions are liquidated, large amounts of Bitcoin are sold simultaneously, which pushes the price down even further. This lower price then triggers liquidations at the next level of stop losses and margin calls, creating a cascading effect that can accelerate the price decline dramatically.
The Role of Leverage in the October 2025 Crash
The October 2025 crypto crash provides a textbook example of how leverage amplifies market movements. The Trump tariff announcement on October 10 was the initial trigger, but the market’s pre-existing condition of extreme leverage was what transformed a significant price decline into a crash.[1]
Think of it this way: if the market had been operating with normal, healthy levels of leverage, the Trump announcement might have caused Bitcoin to drop 5% to 10%. Traders would have taken their losses, and the market would have stabilized. However, because the market was overleveraged with open interest at unprecedented levels, that same announcement triggered a much more severe decline. As prices fell, liquidations began, which caused prices to fall further, which triggered more liquidations, and so on.
The 24/7 nature of cryptocurrency markets made this situation worse. Unlike stock markets that close at the end of each trading day, giving traders time to reassess and adjust their positions, crypto markets never close. This means that liquidation cascades can continue uninterrupted, potentially accelerating the decline.
Why Leverage Builds Up in Crypto Markets
Understanding why leverage reaches such extreme levels requires looking at the incentives in cryptocurrency markets. When prices are rising, traders who use leverage make much larger profits than those who simply buy and hold. A trader who buys Bitcoin with 5x leverage makes five times as much profit when the price goes up 10% compared to a trader who buys without leverage.
This creates a powerful incentive for traders to use leverage, especially when prices have been rising for an extended period. As more traders use leverage and prices continue to rise, the success of leveraged traders attracts even more traders to use leverage. This creates a feedback loop where leverage levels keep increasing.
Additionally, cryptocurrency exchanges have an incentive to encourage leverage trading because they earn fees on every trade. The more leverage traders use, the more they trade, and the more fees the exchange collects. This creates a misalignment of incentives where exchanges benefit from high leverage even though it increases systemic risk.
The Broader Market Conditions
Beyond the leverage issue, several other factors contributed to Bitcoin’s decline in October 2025. Lower trading volumes had magnified the impact of large trades, leading to heightened volatility.[2] When trading volume is low, large sell orders can move the price much more dramatically than they would in a high-volume environment.
Economic concerns also played a role. Weakness in China’s property sector reinforced the perception of Bitcoin as a risk-on asset, meaning an asset that investors sell when they become worried about economic conditions.[2] During periods of economic uncertainty, investors tend to move their money out of risky assets and into safer assets like government bonds and cash.
Additionally, specific events like the shutdown of Binance Connect and notable departures from crypto firms shook investor confidence and contributed to the selling pressure.[2]
The Cascade Effect in Action
When we look at the October 2025 crash through the lens of liquidation cascades, the sequence of events becomes clearer. The Trump announcement provided the initial shock that started prices falling. As prices fell, traders with leveraged positions began to see their collateral values decline. When the price fell far enough, exchanges began automatically liquidating positions.
These liquidations added to the selling pressure, pushing prices down further. As prices continued to fall, more liquidations were triggere