One of the crypto phenomena bizarrely not often enough discussed in polite company is the frequency of crypto exchange failures. High profile, significant customer-impact events like the implosion of GotX and FTX seem to be related to the category of “shit happens”. But crypto exchange failures happen with such frequency that there’s even a genre of academic genre dedicated to studying them to identify in advance which exchanges are less vulnerable to collapse, apparently so as to aid crypto punters. A recent one found that there had been over 500 crypto exchange failures since 2014.1 CryptoWiser’s Exchange Graveyard provides one compilation.
Mind you, this sort of thing is unheard of in the real world of public markets, as in regulated securities and commodities. We’ve recounted how the Chicago Merc nearly did fail in the 1987 stock meltdown.2 We have warned repeatedly of the fact that a new favored mechanism for preventing exchange failure, that of central counterparty clearinghouses, are “too big too fail” entities and are at risk of failure in a serious market downdraft. Nasdaq Clearing got into trouble in 2018 when a customer loss exceeded his reserves, forcing other clearinghouse members to pay 107 million euros to reimburse the hit to the default fund (see this Bank of International Settlements article for more detail).
A pause for some schadenfreude about the Trump-China-tariff-threat induced crypto meltdown on Friday:
My plan was to make $100k trading crypto this year.
$150k to go pic.twitter.com/b8o10cTf2T
— Not Jerome Powell (@alifarhat79) October 12, 2025
“So you put $5,000 on a credit card to trade crypto, and in five years you turned it into $9 million?”
“Yes Dave”
“And you then lost it all in twenty minutes, and in those five years you never paid off the credit card which now has a $28,600 balance?”
“That’s correct Dave” pic.twitter.com/1sUlolwRPY
— Michael McQuaid (@michaelgmcquaid) October 12, 2025
I made $1,500,000 in one year
Lost $2,000,000 in one hour
Welcome to crypto pic.twitter.com/h256FyqPTo
— 🇦🇪 Rami Al-Hashimi رامي الهاشمي (@rami_hashimi) October 10, 2025
The crypto swoon of last Friday not only resulted in a lot of leveraged players having positions closed out at a loss (producing at least one suicide), but also some customers with positions in profits also having accounts dinged to pay for losses at their exchange. Mind you, this practice is substantively no different than the haircuts applied to bank depositors during bail-ins in Cyprus bank meltdowns in 2013, in Greece in 2015, and Spain in 2017.
It’s entertaining to see CoinDesk try to talk about the near-failure of exchanges that triggered these actions, in a “nothing to see here” tone. Yet the piece admits these so-called auto-deleveraging, aka ADL was the last bulwark against failure. At the top of its article:
ADL is a last-resort backstop that activates only after liquidations and remaining buffers fail.
We’ll get to some of the less-than-precise explanations. The short version is that the exchange raids the accounts of customers that have assets, supposedly according to rules, but as we’ll see, this is not well disclosed despite pretenses otherwise.
US cyrpto players may have been subject to this sort of, erm, forced contribution. US regulations bar leverage of “spot” holdings. However, one type of contract identified as having been subject to forced liquidations is “crypto perpetuals.” They have been permissible in the US since July under CFTC regulations with 10x leverage. However, even a wee bit of poking in internet searches unearthed the fact that there are plenty of coopeartive oversesas players who will take US customers, provided they use a VPN and misrepresent their domicile. Of course, having violated “know your customer” requirements, these crypto travelers are subject to rough handling if the exchange catches their misrepresentation and decides to Do Something. So US customers could have been exposed by playing even more so on the wild side.
Auto-deleveraging is the emergency brake in crypto perpetuals that cuts part of winning positions when bankrupt liquidations overwhelm market depth and a venue’s remaining buffers, as Ambient Finance Founder Doug Colkitt explains in a new X thread….
Perpetual futures — “perps” in trading shorthand — are cash-settled contracts with no expiry that mirror spot via funding payments, not delivery. Profits and losses net against a shared margin pool rather than shipped coins, which is why, in stress, venues may need to reallocate exposure quickly to keep books balanced.
So let’s stop there. If you don’t own coins in your own wallet, you don’t own them. You are part of pool. Even with a wallet you may not own them (a bit more on that below; technically the wallet is the custodian of your keys….and what has your agreement provided with respect to the coins?) .
Back to CoinDesk:
In normal conditions, a blown-up account is liquidated into the order book near its bankruptcy price. If slippage is too severe, venues lean on whatever buffers they maintain — insurance funds, programmatic liquidity, or vaults dedicated to absorbing distressed flow.
Notice the gobbledegook. Returning to the article:
Colkitt notes that such vaults can be lucrative during turmoil because they buy at deep discounts and sell into sharp rebounds; he points to an hour during Friday’s crypto meltdown when Hyperliquid’s vault booked about $40 million.
The point, he stresses, is that a vault is not magic. It follows the same rules as any participant and has finite risk capacity. When those defenses are exhausted and a shortfall still remains, the mechanism that preserves solvency is ADL.
The analogies in Colkitt’s explainer make the logic intuitive.
He likens the process to an overbooked flight: the airline raises incentives to find volunteers, but if no one bites, “someone has to be kicked off the plane.”
In perps, when bids and buffers will not absorb the loss, ADL “bumps” part of profitable positions so the market can depart on time and settle obligations.
And why should the customers subsidize the exchange?!?! At least in the US, when you are kicked off the plane, because regulations (after years of voter howling), you are compensated pretty well.
Again from the piece:
He also reaches for the card room.
A player on a hot streak can win table after table until the room effectively runs out of chips; trimming the winner is not punishment, it is how the house keeps the game running when the other side cannot pay.
How the queue works
When ADL triggers, exchanges apply a rule to decide who gets reduced first.
Colkitt describes a queue that blends three factors: unrealized profit, effective leverage, and position size. That math typically pushes large, highly profitable, highly leveraged accounts to the front of the line—“the biggest, most profitable whales get sent home first,” as he puts it.
So all of these libertarian crypto bros have signed up for socialism: “From each according to his abilities?”
We conferred with derivatives maven Satyajit Das, who confirmed our reading:
• As you know, crypto makes Enron and Lehman look the Vatican of governance so nothing is surprising.
• I am not across all the details (I have read a few T&Cs but the tech-bros are not good at paperwork!) but:
I am unsure about ownership issues when you own bitcoins etc as it is via the wallet i.e. does the wallet act as a custodian or does it hold title with you as a beneficiary (the pool you mention suggests that the wallet or exchange is the owner with you having a stake in the collective holding i.e. a fund type arrangement)?
Many exchanges offer leverage or on a couple of occasions what seems to be derivatives on bitcoin (like the perpetual futures you mention). I have never worked out whether that means you own the crypto and they lend to you against it as a pledge or even how that works given that legal rights etc are not the strongpoint. Also providing leverage against an asset with 40+ monthly volatility suggests suicidal bravery!
I have tried to look at the waterfall in exchanges but it is opaque. Beside why would you need it as it always goes up!
• To me (what do I know!), the auto deleveraging looks like a margining and liquidation process designed to protect lenders etc. This would be only required if there was leverage involved. If you are a simple outright full funded owner than price fals don’t matter do they? You simple lose what you have invested.
• Attempts at regulation resemble the blind leading the deaf and dumb. It will be intersting to see if moral hazard means that authorities socialise the losses (it is of course coincidental that the the US administration’s insiders are heavily invested in the sector and the crypto industry major donors.
•You now it’s not good when any industry (other than nibble and drinks) takes out pricey Super-Bowl ads.
A key point is that even a heavyweight like Das can’t get to the bottom of the waterfalls (as in the ordering of who gets hit in the event of a loss at an exchange and the limits) makes a mockery of the CoinDesk handwave that this was all disclosed and those who were surprised at having gotten dinged didn’t do adequate homework.
Sadly, it looks as if the crypto losses are not yet severe enough to deter the Trump Administration push to get everyone into the pool for the purpose of better fleecing.
____
1 The largest single category was simply halting operations, so one is left wondering what happened to customer assets.
The failure of exchanges, contrary to popular perceptions, is not impossible. We came within three minutes of having the Chicago Merc and likely the NYSE fail in the 1987 crash. The Merc customer was where S&P index futures traded, and a customer failure to pay $400 million meant that the Merc was similarly going to come up $400 million short on a loan it owed to Continental Illinois. The executive responsible for the account said she could not forgive the repayment. It was only by happenstance that the bank’s chairman was in early that morning and authorized the credit extension, allowing the Merc to open. Had the Merc collapsed, the odds of a knock-on NYSE failure were high. The New York Stock Exchange was also at risk of not opening, and its chairman John Phelan feared if it did close, it would never open again.
And yet, big US financial institutions still say this is a legit asset class. As guess as long as they continue to make money who cares about the investors?
“So all of these libertarian crypto bros have signed up for socialism.“.
Oh, this! I’m regularly amused that the lib.cryp.bros have gone all in on a thing that essentially requires a form of socialism to work properly*: pooled unsegregated resources, consensus of transactions, subsidies…
(*for some strange definition of ‘properly’)
You can be sure that, when crypto seriously implodes, Trump will steal taxpayer money to bail out gamblers.
Nice one for the prediction markets.
Crypto is an ether-based intrinsically worthless commodity whose value is only being propped up by hordes of suckers who want to cash in on dollars.
Is this description more or less correct?
It has some use.
Tax avoidance, payments for illegal stuff, gambling and so on.
The only “good” use would probably be cross border payments when traditional banking doesn’t work.
In keeping with the era we inhabit, everything we were told about crypto “currency” is a lie. It’s not a medium of exchange; it’s not a store of value; it’s not a unit of account; it’s not decentralized (Bitcoin ownership is far more concentrated than traditional wealth); it’s not anonymous.
While I know Trump will steal from me in order to bail out himself and his cronies, I still think a crypto crash is necessary for there to be any hope of undermining/discrediting Trumpismo… and the schadenfreude in seeing these freaks and monsters panic is almost worth it.
Deflationary crypto assets like Bitcoin are most definitely a store of value. And a very good one at that, better even than gold which the USG have appropriated in the past. Even if the government knows about your BTC holdings from tax filings, they can’t seize it if you have a self custodial wallet.
Have any proof of that ever happening, in the latter part of your statement?
Look up Executive Order 6102 💥
Again, please name an instance of the USG appropriating #79 from a private citizen
EO 6102 was a request, not a demand~
To throw a little shade on things, around 1935 it was decreed by the USG that coin collectors, or anybody for that regard, could own any pre-1933 dated gold coins, making even more of a moot point of EO 6102~
“Executive Order 6102 was a 1933 directive by U.S. President Franklin D. Roosevelt that outlawed the private hoarding of gold, forcing citizens to surrender their gold coin, bullion, and certificates to the Federal Reserve in exchange for paper money at a fixed rate of $20.67 per ounce.”
Unless you have physical gold stash that you have full custody of, gold held with other trustees are not safe!!!
After all that gold was taken up by the Federal government, didn’t they set the value then at about $36 an ounce?
The story gets even more interesting…
When I was in the biz, Europe was the happy hunting ground for older $10 & $20 gold coins which contained just under 1/2 an oz and 1 oz in content.
Switzerland, France and Belgium was where they all seemed to go when I plied my trade in the 80’s and 90’s there.
What happened was this:
Banksters of the era bought up all the gold coins at face value and then when FDR came up with a $35 per oz value-seeing as we owned the lions share, the rest of the world played along.
Said banksters cut a fat hog of about 70% profit on each and every coin they sold into the European markets, circa 1934~
Couldn´t the ¨USG¨ just put you in jail (or worse) until you cough up the code?
There are millions of BTC holders, they can’t put all of us in prison. At least, not for long. 🥺
“And a very good one at that,”
Unless the exchange/crypto house gets hacked, goes under, turns out to be a Ponzi scheme, etc. And heaven forbid you lose your key…
Crypto has so many issues it actually makes putting money under your mattress look like a good idea.
Anyone who stores their life savings with someone else is bound to end up with nothing! 😮💨
Crypto makes each person their own bank 🏦 and it’s easy enough to store the encrypted seed in several locations 🗺️.
Nothing that fluctuates the way Bitcoin has (and will) can seriously be called a store of value.
Bitcoin’s volatility has reduced a lot since institutions and ETFs have come into the space since 2024. 🌌
As the instrument matures, it’s only going to get less volatile. We’ll get to gold level volatility within a few years. Already most speculators have moved onto ETH and other cryptos that are more volatile. 📊
so crypto exchanges really are just Ponzi schemes, gussied up with “tech” aren’t they?
I’m thinking about residential real estate, a market that, in theory, should be transitioning away from traditional financing, due mainly to unaffordable insurance, to transactions settled in cash.
For those who play the ponies (I do not), that’s quite a dip in a sector (crypto) that has broad support.
All of these used some form of distributed ledger technology which touts lack of central authority as its main benefit. Decentralization and consensus are key features of this technology. How would this work if say, I was the only one making a huge profit and everyone else using this distributed ledger was making a huge loss? Suddenly, none of the other participants would have any incentive to continue using this ledger.
Does this not imply distributing the losses to keep the ledger alive?
I work with someone who is all in on crypto. It is literally all he talks about (He even volunteered to me he got written up at his last job for talking about crypto so much.) I’m not in the office today, but I wonder if he’s still talking about retiring early and being a millionaire.
My late mother had 24/7 hospice nurses at her assisted living place for about a month in the summer of 2023. They were all Filipinas and one of them asked what I did for a living, and when I told her i’d been a coin dealer, she embraced the moment to divulge that she had put everything in Bitcoin-and not having the heart to tell her how the twain never shall meet despite having the same name, she prattled on about how good it had done ($31k @ the time) and i’d never met anybody who was into it like that, so I congratulated her on such good fortune, etc, etc. and then never saw her again after mom passed.
Human psyche being what it is, if she’s still in the casino and hasn’t cashed out her gotten gains, probably stands to lose everything, and wins are satisfying-losses are beyond bitter.
I’m not expecting a Filipina RN to go appshit when the deal goes down, but the more likely investor is a 26 year old male, and…
I am curious whether an ETF like GLD is similarly risky…
No. Multiple category errors. GLD trades on regulated exchanges. GLD is not leveraged.
…or cash in a MM account in retail Etrade or Schwab should there be a big downturn and autosell of margin customers isn’t enough. Is it like reatil banking, where a deposit is an unsecured debt for the bank.
I think the risk in a MM account is “breaking the buck”.
Or 7 trillion eggs worth all in a safe Treasuries basket, what could go wrong?
There may be some precedent in this in the failure of MF Global Commodities in 2011.
I had some cash in my MF account and NO commodity positions, so only cash.
MF Global apparently (led by former NJ governor/senator Jon Corizine) co-mingled my cash with MF’s to try to keep MF afloat in some trading positions.
Needless to say, I was not happy to potentially lose the cash, as I thought it was safely stored in an account that could not be used by MF Global if they got into trouble..
While I eventually got all my cash back, if MF Global had been able to take any of the cash, it would have been a very black eye on the entire commodity trading industry, so the industry may have rescued MF Global customers in the industry’s self interest if necessary.
While I don’t see the crypto industry much concerned about reputation, for main line brokerages such as Schwab, Fidelity, E-trade to take customer cash as their own would do great reputational damage.
Sorkin weighs in
The Rules of Investing Are Being Loosened. Could It Lead to the Next 1929? NYT archive.ph
As a continuing upholder of the No Crypto Pledge . . . ( I pledge, upon my honor, that I will neither use nor invest in crypto, and that I will not tolerate those who do) . . . I can only say that it couldn’t happen to a nicer bunch of more deserving customers and the only real shame is if they come out of it with any money left at all.
I’m thinking of those “sovereign” crypto mini-states that are built on top of this BS. Are they all scrambling home to daddy now?
Replace liquidation with margin call and perpetual futures with European style options and crypto makes a lot more sense.