Crypto Had Its Reset. How Long Will It Take To Climb Back? - Bits + Bips

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I think many people kind of realize on Friday that per may not always be the the strongest or safest instrument. Sometimes like liquidity is reduced automatically before like market makers can can even react and reintroduce liquidity in the market which I think once again adds into the whole perfect storm dynamic. >> What do you think about Hyperlid? Is Hyperlid a winner or loser coming out of this? I'm optimistic and bullish now. >> Hi everyone. Welcome to another episode of Bits and Bips, the show where we explore crypto and macro colliding one basis point at a time. Uh this is a very special episode uh just given what's happened in the market over the last uh I guess almost 72 hours or so. Uh

typically we're trying to decide what we're going to talk about dats, Trump, Fed policy. Uh none of that is an issue today. Um, we're going to discuss what happened on Friday, lessons learned over the weekend, and more or less, uh, how crypto is going to respond moving forward. >> Apptos is the no compromise infrastructure for global financial markets. Fast, reliable, and 100 times more costefficient than other blockchains. See for yourself why Aptos is the chain of choice for institutions, users, and developers alike at the Apttos Experience October 15th and 16th in Brooklyn.

But but first just a few quick introductions. Uh I am your host Steve Erlick, high scribe of the Unchained Kingdom. I'm here as always with Rahm Alawalia uh the Maester of wealth leader of Lumida. And we've got two very special guests. So let's introduce them quickly. Uh first we have Carlos Guzman, chief scholar of the C of the GSR Citadel. So welcome Carlos. >> Hello. Love the >> Carlos. Why don't you just briefly uh tell us a little bit about yourself? I would imagine most of our viewers and listeners are familiar with GSR, one of the larger market makers in the space.

>> Yeah, sure thing. So, I'm a research analyst at GSR. We're a big market maker uh across exchanges, centralized exchanges and centralized exchanges in crypto, also a big OTC desk and systematic OTC desk. And yeah, we partner with projects uh to provide liquidity and just also as a broader capital markets partner across advisory uh help with treasury management and AC a bunch of um just other places in the space including uh as a big investor as well. So yeah, pleased to be here >> and uh we also have YQ commander of the rollup armies at alt layer and a special thank you to YQ for joining us because he's in Singapore where it is right now 2:30 in the morning for him. So, YQ, welcome.

>> Yeah, thank you, Stephen. >> Okay. Uh, as always, but but especially true today, uh, nothing that we say here is financial or investment advice. Uh, please check out onchain crypto.com/bitsandbbits for more details and disclosures on that. And, uh, with that introduction, let's kind of just dive right into it. Uh, everybody was getting ready for the weekend. Uh, I had some big plans and then Trump decided to um threaten a 100% tariff on China um due to export restrictions on raw earth minerals and all hell broke loose Ram. Uh why don't we just start with you? Um what were some of your first thoughts and and

reactions? >> Right. So on Friday around 10 or 11 a.m. Eastern time uh Trump shared a tweet saying that he would raise tariffs on China something like 100% or so. that caused a a sell-off uh in equities uh and uh which up until that point in time were up something like one to two percent on the day. So you had a nice rally uh and then so equities started to slide closed down the day uh several points three and a half points depending on which index you're looking at. The volatility fear gauge index jumped 30%.

And then digital assets also took a tumble. And within digital assets, you had altcoins that were down 60 to 80% within 24 hours. And what happened there briefly, I'm sure our guest will unpack it for us, is you had forced liquidations that were done algorithmically. Uh just autonomous cord code that was running and seeking to protect the network by liquidating positions. uh you know, you had faulty oracles set up at at exchanges that were pointing to the wrong reference spot data and uh kind of reminiscent of what happened with 1987 crash portfolio insurance where you had a a mechanism was nominally designed to protect investors but actually had a procyclical phenomena. So it's this classic tale of

a crypto speedrunning banking and markets history. You know, in 2021, it was rehypothecation with the blow up of Celsius and Genesis and these other lenders. So, crypto learned that you shouldn't rehypothecate unless you're a bank with a lender of lessers or an FDIC insurance. So, here's a ne next lesson is really on the market side on the market side of things. Although, it's quickly recovered. You know, it was really unfortunate. I mean, there was I mean, the dispondency uh that was out there. You had people that lost their life savings. They were uh acting in their minds prudently too.

You know, dollar cost averaging over several years. Uh but they were forced liquidated. They might have had uh some leverage and this was all in the Perfs market primarily where this pain was meed out. Uh spot market also of course had some volatility but not nearly as much as what you saw in Perfs and especially on on Binance. So an incredible couple of days. I think they're winners and losers coming out of all this. I imagine we'll get into who those winners and losers are. U but >> yeah well speaking of the winners and losers I mean YQ you had a really interesting um uh article on X. Uh there's a lot of disc there's there's a

lot of discussion I guess in the air supply. Was this a coordinated attack? Did CZ try to take out Hyperlid? Um but but it looks like certain attackers, if you read the tea leaves the right way, um they nuked ENA or ETH uh USD on on Binance um led to a concentrated crash on certain tokens um because of a window of opportunity related to uh oracles on that particular platform that then they were able to take advantage of on Hyperlid to the tune of I think $192 million and cost something close to $10 billion. in liquidations on Hyperliquid.

Um, can you kind of just walk us through that and and in the ensuing time since you posted that, what have you learned that may or may not change any of your opinions or conclusions? >> Yeah. So um as you mentioned right there are a lot of coincidence like after I really dig into a lot of details regarding uh this kind of the biggest uh crypto liquidation event um like regarding the timeline right as uh right mentioned uh but here I will just use the Singapore uh time zone as a reference. So actually the market started to uh behave after this kind of announcement on the tariff news around

like 5:00 a.m. uh in Singapore time on Saturday and then after that basically the crypto market um started to behave like basically there are a lot of uh uh sort of shorts and basically the entire market uh plunge a lot um until like sort of uh 520 if you look at the chart right uh no matter for the majors like uh Bitcoin, ETH or some other altcoins right and basically drop like dramatically by this sort of 30% 50% or even um like sort of 99% I was somehow awake at that time. So

basically I literally watching this kind of a waterfall drop um for most of these altcoins and that is sort of like the first uh round of liquidation. um like from the other reports like some like sort of also this kind of uh liquidity vacuum um basically due to a lot of uh uh traders market makers they withdraw the liquidity from it and uh it's also because like the market reaction was huge and basically um it also trigger no matter the CEX ADL on the auto uh deleveraging mechanum all these kind of uh like uh DAX perex like hyperlquid is ADL. Um so then like sort

of uh around is 54 uh 3 a.m. Um basically um the USDE and WBTH and also BNO started to uh collapse. um around night time around like sort of 16 million um u USD equivalent like sort of USDE dumped on the market. Uh of course there are multiple reasons right um like there's some um some reason like say okay it was caused by the first round liquidation and a lot of positions or collects basically not enough to cover the margin. So then like sort of the exchange take over like sort of their

margin and start to dump on the spot market. So that that caused a depag of USDE and after that because like on Binance or some exchanges right they use the WBTH and BNO as a collateral uh for their margin. So in that case like further cause this kind of loop of liquidation um until like sort of the next half hour or one hour the entire like sort of market structure like basically is completely off um and why we feel like um it's it's not just a single liquidation because there are two wrongs one is like sort of these odds liquidation around like 520 and there's another further second round of

liquidation including the depaging of USDE around like 5 uh uh 43 and 544 uh and beyond that um why we like sort of in the posts all that sort of tweets right I feel like um probably also can be a coordinate attack is because like around few days ago back in sixth October uh Binance announced like they will start to do some adjustment of this oracle for the BNO and also uh WBET and which will be conducted uh around like 14th of October. Um it's just like so coincidence like um um like just between

these few days, right? And then like uh it's not it's not just about the first liquidation of all all coins but the second liquidation like directly target like sort of the uh three assets uh USDE BN so and also the WBTH it's basically exactly um sort of um the assets and uh like in the announcement. So that's why we feel like probably can be a a target a coordinate attack on it. And then uh in the third like sort of article I mentioned right is somehow it's related to this or oracle problem. We're quite familiar with Oracle for the DAX right uh compound RV and uh and alo like but

the things like for CEX especially for this specific case right for example USB insole and also WBDTH um before the adjustment um partial of this price index is associated with the spot price so that's why in the second uh liquidation we can see that when sort of the price was down and uh and basically you you unless you have a lot of liquidity to buy it back otherwise you have the price down the oracle I mean the market price down further so it's really cost this kind of cascading um liquidation so that's one of the like reasons we feel like um it can the root

cause maybe just about the or >> there were large there were large short positions placed prior to the sell-off >> and You can see these on chain >> like 100 million 200 million plus short positions that also covered at the opportune time. So it does look >> suspicious but you kind of in your theory of it which I think is a good theory by the way it's very suspicious. Now the question is like who would be the actor here? It seems like uh you know the core issue was that Binance was using its own spot order book to measure the collateral value as opposed to a third party oracle that's taking the median of the bid ask spread across multiple venues weighted by liquidity or

something like that. So you can get a mismatch between Binance's uh the spot prices on their order book which they're using for risk management and margin maintenance variation margin and liquidations against what the prevailing market is to your point. So if I build on kind of your theory, someone that understood the inner workings of this or just saw the announcement from Binance that they're going to change this in a way it's like a zero day hack, right? A zero day hack is an exploit that you can take advantage of, but there's no patch for. Now, this isn't a cyber security hack.

It's a market microstructure hack. There's a gap in the market. So, one alternative explanation is that when Binance announced that, whoever had studied this structure, they knew they had a short window in time to take advantage of it. You combine that with Trump's news, it created the perfect window, especially going into the weekend when everyone's asleep and liquidity is extremely low and you can push a market. >> It sounds >> I'm in conspiracy tinfoil camp too on this one. Doesn't look >> It sounds almost something where akin to like a flash loan type type attack because because like there was no vulnerability that was exploited as you as you mentioned Rahm like like they went right through the front door and used publicly available information to take advantage of something. Uh, I mean

it gets tricky if I mean as we're we're we're all wearing our tinfoil hats. They're um conspiring to drive down the prices of of particular tokens and then doubling down by placing massive short positions at what happens to be Binance's chief rival, like the first exchange that's really made Binance sweat in in years. Um, but we'll see. I >> came out with an apology, don't forget, just to share their part of the story. They said, "Hey, we have a lot of lessons learned from this." >> And you might make the case that maybe North Korea was the perpetrator. I'm just like there still not clear. But anyway, go ahead.

>> Yeah. I mean it's one of those things where I mean like AAMS raised what's the most likely scenario or most likely explanation like and and YQ you even mentioned this in your um in your report like there is a way to read all these different clues and say it was not some sort of conspiratorial attack but it was just a couple of opportunistic actors or and just a perfect storm of events but hey it's always fun to wildly speculate so let so let's let's do that uh as as well um Carlos I want to kind get your your point of view in here and and uh and like it's really interesting. You're at GSR. I mean, you kind of pick yourselves as like the capital markets partners and I'm sure you do plenty of business at at Binance. I mean, from

your point of view, uh, like what was going on, um, at that time and and like how does a how does a company like GSR respond to something like this when it certainly appears that a lot of like the more like market neutral players were the ones at most risk during this acute period of time on Friday? >> Yeah. No, for sure. Uh, I mean, it was I think Friday was just um a perfect storm of all these risks. I think you got Yeah. Yeah, I think right as after like Trump tweeted, you get like a big market dump and then uh just an incredible wave of liquidations in PERS. I think we just have we just seen lots and lots of leverage um accumulate in per um and I think just like when markets are falling

uh I think the natural reaction I mean for biggest digital players like GSR uh it's extremely important for us to take risk management extremely seriously. Uh and I think many players like did that uh at the top uh and we do that across like many venues uh and across many different uh instruments. I think many people kind of realize on Friday uh that per may not always be um the the strongest or safest instrument. I think yeah I mean part of the the story of of Friday is learning about uh counterparty risk and exchange risk. Uh so for instance um I mean we saw a lot of people get liquidated on the long side

but then on the short side once ADL kicked in to secure exchanges solvenies um many people's short positions also got closed uh oftent times you know at P&Ls much lower than they would have they would have expected um I think this has the potential to have realized pretty significant losses um for uh funds running uh long short strategies, funds running like delta neutral strategies, market makers like like GSR, we obviously we run like delta neutral strategies. Um but we're not only using per uh so I mean fortunately for us um uh we were not majorly affected um but

it it can be the case um that other kind of big funds um might have there's there was a rumor that you you you had a the destruction of one or more of these market makers over the weekend. You would be the one of the first to know. >> Yeah. I mean I've only seen rumors so far. nothing uh really concrete or substantial. Uh >> right. >> But I for for for market makers that took you know I mean well marketers like GSR are very much aware of like all these all these mechanisms that can happen and take risk serious you know what did GSR do I know you're on the analyst side rather than you're on the research side rather than the trading side but there were points on Saturday

where the bid spread on assets were 30%. It's insane. Okay, put that into perspective. If you want to get into position, you're paying 30% more or 30% less if you want to get out of position. There's no liquidity. And the other part is that the other kind of learning from all this is that there's I think a lot of people probably know this, but the fact that it happened all at once in this situation is that there's limited depth of order book the farther away you go from the prevailing market price, right? Think about like how uh dexes work like unis swap for example they use these con like bonding curves to create liquidity.

Uh bonding curve is just a fancy word for a math formula that describes a change in price relative to you know demand of one unit in this pair relationship. That's it. Um nothing fancy about that. And you know um you know I guess that system worked. That system worked. Uh but clearly if you're seeing a bid ass spread of 30 points wide there's no one was providing liquidity then the market makers it seems that market makers had completely withdrawn and if you were trying to get involved and take advantage of that you could but you're paying through the nose just to enter the market. Yeah, and actually I want to just build on that

Carlos before you respond too. I I think there's a bigger lesson here to learn and for people watching uh to understand liquidity especially for alts. I mean, not the Bitcoin and ETH and and Salana, but I mean, and and I'm not even just talking about um what acutely happened on Binance, but uh it's hard for people watching to understand um order book depth, especially when uh exchanges and tokens employ market makers that do a very legitimate um play a very legitimate role in in trying to maintain orderly markets.

something like this happens and like like Warren Buffett says you kind of see who was swimming with no clothes like how should people trying to understand what happened and at some point they're going to get back into alts like what are some of the lessons they can learn to understand uh and make better decisions on on where to trade and and and and avoid some of those that slippage that Ron was alluding to. >> Yeah, for sure. So I mean getting a bit into into Ram's point, it was Friday was extremely chaotic. I mean I think we saw a lot of exchanges also uh kind of start to uh not operate like fully well. Uh orders weren't executing, APIs weren't

like fully working. I think we also like saw some UI issues. But I mean, but what also tends to happen in these kinds of situations when there's like when there's a big market drop uh often times liquidity is reduced uh as market makers are um basic um yeah basically managing risk or quoting wider spreads. Uh because oftentimes it's it's without information on what exactly is happening. uh market makers can't quite confidently quote at a certain price before you fully know okay is this some sort of excitingness major event is this um more like um relate to like the price of a specific asset before like

information really comes through before things are clear uh and market makers can once again confidently start quoting prices uh market makers tend to look you know in in periods of of uncertainty and oftentimes this is uh just coded into bots and automated algorithms. So sometimes like liquidity is reduced um automatically before like market makers can can even uh react and reintroduce liquidity in the market which I think once again adds into the whole perfect storm dynamic. So you're getting liquidations into markets that are getting much thinner in liquidity which leads like further price drops which then leads to further liquidations into

low liquidity markets. Um so yeah this is all just uh a vicious cycle uh that basically >> so this happened in the US equities market in 2011. There was a flash crash for those that remember and uh the biggest critique of the US equity markets after the passage of reggg NMS in 2007's regulation national market system which was designed to create competition for the New York Stock Exchange and NASDAQ which were the then duopoly where transactions happen that reanms was passed to create competition.

So you had the explosion of other exchanges like Arca building on success of like Instinet and Island Archipelago and dozens of other exchanges and it also led to the rise of high frequency trading. Okay. So the criticism was that reggga NMS created phantom liquidity. Phantom liquidity. What is phantom liquidity? So it's a fact that execution for US equity investors better today than it's ever been before in history. You can hit a market order buy, market order sell on many stocks and you'll get a decent fill versus the slippage or or the bid ask spread or different metrics to look at versus it was say 30 years ago where you're paying like an eighth

and a 16th. Okay, now you're paying what are called like mills, fractions of a penny. So now we've had a flash crash in the digital asset market and it reminds me of what we saw in the equity market back in 2011. So I think there some people look at this very critically and say ha look crypto is just a bunch of nonsense like well look I mean this this did happen in the US equity market too. There was also uh you know there are examples in the US equity market where things like this happened there issues that have happened and then there's a market response there's an investment infrastructure players learn uh and then the market heals and and moves on.

Um I I want add a little bit like sort of um um stuff here because like um I've been in crypto over a decade since 2015 and um I have a lot of friends running liquid funds and also some of the their traders either on the CX or the sort of perex. Um the so right after this kind of crash I have a bunch of call with them. Uh some of them got hit. Um the thing is like as uh Stephen just mentioned right um the thing is like previously people feel like per is super useful. Um and uh they do h they do hedging like sort of the lungs um this kind of all coins and do short on uh

sorry they long like sort of bitcoin and do short on all coins for example long on bitcoin short on dodgecoin but during the crash due to the ADL their short position was uh forced to close so in that case there are no more sort of hatch and um due to whatever reason glitches of the server whatever right you couldn't put beads on time so that that sort of like basically during the crash any hatch no longer working so what you can do at that time like basically try to hold all assets in spot so so that that's why a lot of my friends after this kind of crash they told me that uh don't use purple for

hygiene anymore um the uh because like another issue is still back to the Oracle issue a lot of these CX, DX um they are using uh the spot price as a mark price um and uh so as R mentioned right there there's basically no liquidity during the crash and uh you can easily manipulate the spot price uh further liquidation from the other CLOS whatever it further drop that sort of the mark price for per so in that case like you can't hatch and you can only hold that sort of the assets um beyond that um is like um like based on their feedback right another thing they

mention is like um so basically the liquidity or the spread on uh on like sort of CX or DX um is not trustworthy as Raj mentioned right you can have some phantom or ghost like sort of spreads and uh once there was a crash happening right it's basically all liquidity withdrawn and u like one thing like probably we can trust is the AMF uh because most of the LPs on chain and uh you can't like sometimes like the chain like sort of got stuck right you couldn't really withdraw the asset immediately so the liquidity just stick there um but but in general I just feel like the main issue is still like um we

need more this kind of liquidity around this kind of crash of course it's super risky um but um like I just feel like it's uh if we don't have enough liquidity like like basically around this kind of crash there's so many places can be manipulated. Yeah. >> Um before we move on I we do need to take a very quick break um so we can hear from the sponsors who make this show possible. >> Over 3.4 billion transactions processed without disruption. More than 1 billion in stable coins circulating. Over $720 million in real world assets tokenized onchain. All delivered with sub-second finality, block times under 100 milliseconds, and fees less than a tenth

of a cent, making a more than 100 times cheaper than other leading blockchains. Built by the team behind the DM project at Meta, Aptos is what blockchain performance looks like when it's built for global financial markets. Discover why global institutions like Black Rockck, Franklin Templeton, and NBC Universal are building on Aptos and see for yourself at the Apttos Experience October 15th to 16th in Brooklyn. >> So, um, WQ, just just to follow up on on on what you said and and I want to get Carlos's take on this, too. What can be done, uh, to improve liquidity? Uh I mean obviously as the industry grows um there should be more market makers, more

traders uh everything but especially for some of these longtail assets that uh I think it's fair to say we'll we'll face these issues time and time again. Um, are there ways to to better manufacture liquidity or is it more an issue from exchange execution that especially on on the CEX side that they do a better job of of stepping in maybe having bigger insurance funds or um is it a a matter of having more transparent ADL policies?

I'm I'm not sure. What do you guys think? Um so a few things I can I can um sort of um share uh because I'm also writing some other like sort of articles on um further uh investigation into some details of this um uh liquidation event. Um so one thing I I think for CX or DX they should really carefully uh select sort of the assets into their spot and the per uh sections um because for some of these asset right if they don't have enough liquidity themselves um they are super easy to be uh manipulated no ma no matter is sort of the spot price or or this kind of u

um the purple or the mark price uh the issue is not about just pure about liquidity like um since since this small asset right chosen by the CX there always a lot of these kind of whales they want to make more so they want to manipulate the price and uh in that case like if you uh sort of u because a lot of user don't understand what kind of token it is uh they just know there's a ticker it's pumped and then they just follow um so that sometimes really hurt and beyond that Um as Stephen you mentioned right the ADL ADL is not perfect everywhere you got like once ADL is triggered that means it's already in

the extreme situation and basically hygiene is no longer working like either the ADL is for the long side or for the short side right the other side is not working it's basically immediately you don't have the hygiene like sort of opportunities anymore unless you really have a super powerful like 247 team like sort of can really pull the bees immediately. So uh of course we need more transparency for the ADL for most of CX ADL mechanum is not transparent. We don't know like sort of what kind of mechanum they are doing. For example, for a lot of my trader friends they don't know when their short position got closed and then like then how about their long position can kind of long

position got sort of closed simultaneously. That that was not real. it's basically all their long position got liquidated instead of like ADL. So, so um there's so many like sort of uncertainties uh here and there. Um I I just feel like um um there's multiple ways we can fix it. One is like um probably like JSL or the other market makers, they should really figure out ways to provide enough liquidity during the crash. it it it will be a huge risk because you don't know whether market will recover and you don't know like when is the best timing for you to pull beats. The second thing is like we literally need to fix this oracle issue for CX and DX. example the USDE uh guy mentioned like uh it's perfect fine

offchain uh you can redeem whatever like 20 billion dollars if you want but the issue is like onchain side the CX side they have most of the volume they have to rely on the spot price because like people are trading they they don't have the direct way to redeem onchain so that that's another like oracle issue we need to figure out way the best way of course the ADL as you mentioned right um there's no perfect ADL Every exchange has its own ADL. Some exchanges I learned per DAX, they don't even have ADL. So you you should literally be like sort of responsible for your own like sort of positions. Um yeah, the these are all the new things because per is

still very new. Um so I believe RAM probably can give more like sort of sharings based on the web two experience. >> I don't if you can share that. You see that Stephen? So this is a post from a friend of the show, Chris Perkins. Chris is a partner at Coinfund Coinfund and he's a part of the subcommittee that advises the CFTC on digital assets. The CFTC regulates US derivatives holding houses, including uh clearing houses like ICE, which is I believe the largest derivatives clearing house globally. So, TRDFI has solved this problem. That's the headline statement. And the way it

works is every clearing house is regulated to have five layers of protection. And Chris lays them out here. So, the first layer of protection is called variation margin. So, that's when the price moving against you, you've got to post margin to get back to acceptable levels of leverage as governed by the system. If if you don't post margin, then you get a margin call, right? Another margin call. The second level is you seize the initial margin of the person that's borrowing. If they default and they fail to post margin, you seize that initial margin. Ideally, that plugs the hole. But if prices are

moving too much, then the clearing house has its own equity layer cushion. So, it can contribute to this as well. Um after that what happens is there's a default fund. It's not an insurance fund. It's a default fund and members of the clearing house contribute to this fund in the same way that banks contribute to the FDIC insurance fund. Uh those contributions uh are made via different mechanisms including like an assessment. So an assessment is you pass the hat around you say everybody pony up. We got to fix this hole. Uh and then the last step is recovery and resolution, right? That's another way of saying like a bankruptcy like process

where you have an auction of assets. So after the demise of long-term capital management, which people thought was a big hedge fund back in the day, the late 90s or so, books written about this, one of them on my shelf here. Uh what they did is they uh had a uh they looked at like resolution processes for these assets, have an auction for the process. So, so Trosi, Troty solved all this. Now, Chris goes on to say, yes, in other words socialism which is kind of a funny funny response here. >> That's actually I would call that like good regulation. That's good regulation.

Now, to make that come together, you need a uh you know, some framework to govern these exchanges. Obviously, Binance is international. It's outside the scope of US regulation. >> I there's So, we've spoken, I think, about two of the three big causes so far at at some length. I mean, one um lack of liquidity or issues with liquidity. Uh we've discussed um some of the break the glass scenarios that exchanges have to go through and problems there. I I want to just briefly touch on leverage too because like all of this was was I mean that was sort of the the stack of dry leaves or sticks that that set that was able to be set ablaze. And there's some interesting narratives I mean going

on. I mean for one uh I mean what was it like like how how much yeah like $65 billion in open interest was was news which is a huge number. Um but and this long bull market has kind of like led to just a slow growth in leverage. But I'm also hearing too about how some people were liquidated even if they were only like one and a halfx leveraged or 2x leveraged which may not it's a big difference from being 30 or 50 or 100x. Uh so I'm curious like what you guys think maybe Carlos you can you can jump in here first. Uh how should people think about leverage in in crypto? Um what are some like like how unhealthy do you think leverage was before all of

this happened? And uh like are there warning signs? Are there things that that that people can do? Um so that or is it just going to history going to repeat itself where leverage just creeps up and up and up um during bullish periods until there's sort of uh it's almost like like like um burning acres in a in a forest to allow for regrowth. What what do you think? >> Yeah. Uh I think actually my response kind of like ties into like what Ram was saying. I mean I think part of the problem goes back to crypto is you know there's lots of speculators in crypto and the gens and you know I mean uh that's that can be largely fine but I

think that creates uh a situation where exchanges are incentivized to offer greater and greater leverage uh to attract attract speculators and provide like good well you know like the experience that they're seeking u which is you know high volatility potential to to to make a lot of money uh very quickly. But I think we've gone into a situation um where exchanges offer a lot of leverage and there's potentially a lot of traders taking on a lot of risk um that often times, you know, doesn't really come back and and bite them in a in a big way until there's potentially a big like black swan event or what happens is a lot of traders are are

taking, you know, leverage in ways that individually might seem rational, but Then when there's a big market crash um you get like a systemic risk where everything gets correlated because um one person gets liquidated but then that means like the price goes down and like someone else gets liquidated and that ends up liquidating everyone uh you know down to the people who didn't even take that much leverage and like they thought like they were in a safer position or they thought they were like delta hedged but even then like uh their long position uh gets liquidated.

Um, so I think it's it's kind of a a coordination problem. Um, I mean either there's going to be a behavior change uh or people might not take that much risk. I don't really count too much of that happening in crypto. Um, or we find ways to coordinate across exchanges uh to, you know, find ways of of either self-regulating or finding some of these other um mechanisms that can improve liquidity. One other thing I was I was going to mention that could be a mechanism that that crypto can explore is is circuit brokers. Uh can like these can like provide a pause in trading um while everyone just like sort >> happen on a permissionless 247 market

though by the way they're all great but this one like >> yeah I know circuit breakers have been talked about for years. I mean there centralized exchanges I could certainly understand it but I mean Carlos I'm sure you know this as well as anyone. are almost anathema in in Dexus. Uh but uh I'm curious >> first. Yeah, you can trade on your exchange, but then the spot price representing your collateral value keeps going against you and now you're saying I'm I have more risk, right? Or you have a position on exchange A and a position on exchange B and they're hedging each other. You're doing some cross market arbitrage. Now you're frozen here. Could actually be creating risk. So, I I like the general

concept what you're saying, especially the self-regulation. That one happened unfortunately, but it's really what's needed. The NASD um which preceded NASDAQ was a self-regulatory organization that was born in the wake of all the scandals and nonsense that you saw in the in the Pink Sheets market in 1950s like lack of standardized disclosure, conflicts of interest. So the industry came together they formed the NASD which subsequently evolved to FINRA and FINRA the board is composed of members of the buy side I believe it's led by the former president of Bridgewwater that makes sense because the market ultimately is about serving investors it's about investors investor if investors are happy then that means

other things are working downstream focus on making sure investors are happy they'll drive accountability in the right areas uh there has been no self-regulatory organization There's no incentive for anyone to build one. They need to do that because if this were to happen in the US administration and if retail investors lost a lot of money, then you'd have the heavy hand of government come down and force regulation. >> Yeah. Well, speaking of like building on that, Rahm, I mean, it's kind of interesting that this happened and we're having this conversation. And I'm I'm not ignoring the irony here that we're talking I'm in Philadelphia, Ram. I guess you're in North Jersey, Carlos, you're in Spain and Yu, you're in

Singapore. But we're having this conversation while the government is closed and anyone who sends a message to the SEC gets a very nice reply saying, "We are not uh monitoring our email accounts right now until um due to appropriations." Uh but >> it's a subcri. >> Well, look, if you did email them, they still wouldn't respond. Stephen, come on. >> Nine months, you got me. >> Fair enough. nine months would go by and they would say, "We acknowledge your request. Uh, can you get in line and we don't know what your request said, but here's a form response. Good luck." And go to the sec.gov website and fill out another form. That's what happened.

>> But any point taken, Rob. But anyway, like we're in the middle right now of of what appears to be intense negotiations, notwithstanding maybe actually a DeFi uh hiccup um on the part of Democrats, which perhaps maybe is much more relevant now than even was a couple of days ago. But like we're trying to negotiate market structure legislation to get it and this is a perfect example of why it's so critical and that the discussions about about it have a lot more to do within what kind of token is a security what is a nonsecurity I mean handoffs between the SEC and CFTC these types of of resolutions when there's periods of acute stress like as Ram you

were saying this was solved for the most part in Tradfi. Um, this was I guess you can make an argument the worst day in crypto's history. Um, so it's not the norm, but a lot of people hurt lost. I mean, I know that the $19 billion liquidation number doesn't actually mean $19 billion was lost, but like this impresses the importance of getting um regulation and I think also m underscores how difficult it could be to get it done by the end of the year, which is what people want. I I'm haven't read clarity or closely or closely enough in recent days to understand exactly how this part fits into it, but I'm sure that everyone is talking about

this and how it fits into the discussion. So the I this just um some extra stuff on the crypto compared to uh tree because like um Stephen just mentioned about like like sort of what the what are the measures we can apply right the thing is um crypto especially for perpetual right there's no clear definition in the US I mean even Coinbase has a perpetual but it's like five or 10 years futures you know right it's is something completely new and then for this time I think one of the root cause uh causes is really about this we call cross margin

or unified account so basically all your assets uh are treated as a collual when you open long or short positions and that means like even you open like sort of 1x long during this kind of market crash right it's basically everything all your position all your like sort of assets in your unifi account gone even 1x so because like it dropped like 99%. this it's it's it's super crazy and beyond that we also have something called this uh I'm not sure whether you guys are doing some D5 protocols we have something called looping looping to get extra yield for example we deposit >> UIDC get the UID and then we basically

we can learn uh uh like UI get UID and then we deposit UIDC get more USD and we do this kind of looping to get this extra APY uh It's not like this kind of perpetual it's a lending but as you can see right we can get as much as as high as like sort of three or fivex leverage u because a lot of user treated like the the it won't deping but in reality like for example in this kind of market crash right uh it is no longer working there's a lot of hidden leverages here and there um especially in crypto there's a lot of new stuff Um I I think it's good like we can have

some regulation but at the same time I I think right now immediately we need to figure out ways to really alert users like for all different risks they are like sort of >> no one's raising the no one's reading the ULA the end user license agreement uh disclosure is not the answer to this complex question when you have a user that's looking for 100x leverage as the primary value proposition on the per they're not like let me look at page nine of disclosure, right? But what do you think about Hyperlid? Is Hyperlid a winner or a loser coming out of this >> the at the beginning I feel like um I can't say it's a winner or loser but

like out of this 19 billion I saw liquidation like 10 billion from hyperlquid that's why from their um they call HLP is basically their vault earned like $40 million immediately. So uh of course people saying that it's good for hyperlquid but when you think about for the users right a lot of my friends got liquidated due to the ADL meanda um but at the same time ADL like sort of stop like sort of earn or loss for them but at the same time on the other side they're also doing hygiene the other side basically everything got liquidated >> right so >> so I think for users definitely is not good but of course hyperlid show that

it's pretty stable during this I I think they're a winner. I mean, Hyperlid, yeah, what you're saying is like they made money. Uh, unfortunately, they made money through this high volume of transaction activity. Customers, >> their own users. >> They're user. That's the Now, but on the users, again, it's a derivative. So, they're they were winners and losers on that side. These are derivative products. So, derivative, that's a zero- sum transaction. The unfortunate part is that their users were carried out and liquidated at the exact worst time and it wasn't in their control.

That that's what makes this terrifying. But there were, you could call it like responsible players that made good decisions, but due to market structure issues, they were liquidated. That's the that's really the worst part about this story. So, but I do think that, you know, I still think they come out ahead as a winner here though. I think uh that's that's my view, but I agree like on your point like anyone that was subject to this ADL issue is any user is a loser of course, right? But some exchanges like Binance took some reputation risk. They had to like they you know they gave out this statement they said hey apologize we made this change. They said they said we have many

lessons to learn. I don't think they had an apology. That might be an admission of liability. They we have we're reflecting. We have many lessons to learn and they've since updated kind of the whole Oracle mechanic works. Well, I think I think them paying $283 million is a is a certain admission of of of of something, but I know you mean Ramen in like the legal sense and and and who knows. I I I'm willing to bet there are plenty of other people that aren't included in that 283 million that that might be looking at other forms of recourse. And I I'm curious like the phrasing the winners and losers uh because I mean Hyperlid certainly passed I would say a stress test. I mean DeFi overall I think did a pretty good job passing the stress test. But if we're defining winners as somebody whose

reputation was burnished by >> did fantastic. >> Yeah. It's >> so Carlos let's look ahead and let's talk about what the market's doing today. Uh I I know we sometimes can joke about Taco Trump. Uh he sent out a tweet on Sunday telling everybody to calm down that is 100% tariff threat was I'm not sure it was a joke but uh but that basically will figure a way out of it and the market seems to be taking him at its word. Uh Trafi is up. Bitcoin as we're recording this is at about 115,000 and change. ETH is back up above 4200.

BNB is uh above 1,200 and the market seems to it hasn't obviously gotten back all of what was lost on Friday, but it's it's certainly recovering. What are you seeing right now and kind of like what are some of your expectations uh in the ensuing days assuming that there's not another big shock? >> I mean, I I fully expect we'll see more of a return to normality. I mean notwithstanding any you know further uh just chaos on like the tariff side and like that you know happening uh again but it seems like you know over the weekend uh the Chinese government kind of

clarified that uh you know their announcement or like their restrictions uh on like rare earth metals exports like were like kind of like potentially miscommun communicated or misunderstood by the US government. So we saw like the Trump administration u kind of over the weekend also walking back uh the threats of 100% like tariff restrictions um which I think like really really calmed markets. Um so I mean I think we're with with that passed which is it's a little bit ironic because tariffs don't really have a direct impact on crypto.

If anything, uh, you know, crypto is an asset class that could be seen as a hedge against assets that are directly impacted by rising prices of imports like, you know, a lot of equities uh and and other assets there. But notwithstanding, I mean, we know crypto is highly correlated with equities. And I think like the response was basically just uh a similar reaction to what happened in in April and everyone just being very much primed to react ne negatively to tariff news. But I think it seems like things are largely back to normal on the trade side. I mean there's you know still some uncertainty on exactly how um the agreements between the US and China will play out. I think

largely we have a lot of tailwinds in crypto. Uh and notwithstanding like those relationships once again uh you know uh flaying uh I think we can we can expect the market to kind of keep recovering and and get back to pretty much where it was. >> Um I mean Ram or or Y do you guys have any thoughts? I mean, one chart that I had been paying attention to was sort of like plotting um like major stock indices with crypto where like stock indices kept going up and setting new highs. I mean, it was even on set to do it again on Friday. And the crypto market cap had kind of been staying still, staying flat for a few weeks or so. And that kind of fed into I guess

one of the concerns that I might have had that uh I mean crypto has been propelled by Trump administration. a lot of positive stuff coming out of DC. Uh the DAT narrative, even though the DAT narrative, and we've explored this, ROM, isn't everything it's cracked up to be because a lot of these big raises that we found don't necessarily represent netne buying and perhaps it was a little bit of a facade. So perhaps like the market was sending us signals of of weakness or skittishness in the event of a bearish stimuli which we saw in spades and and granted it was accelerated because of the the acute issues of Binance and stuff that we discussed but I I wonder if this is going to be a warning sign for some additional retrenchment and and hedging. uh e even

if the market sort of like goes back on a similar path uh because people don't necessarily want to get get burned again like I I wonder if that's one of the bigger takeaways from what happened. Ram, you disagree. Go ahead. >> Can I make my Nothing comment here? >> Yes. Go ahead, Mr. Nothing. >> Okay. So, let me share my screen here first. I'll share the Bitcoin real quick and then we'll shift gears. Well, actually, so this is an interesting one. This is when I was at the Puerto Rican airport waiting for my flight home. As I'm as I'm landing in Newark, by the way, that evening, my phone is blowing up with Bitcoin down 5%. I'm like, I'm just seeing all this price. These are notifications when broad price moves happen. Pretty wild. But I was at I was

at the uh airport in San Juan and they had tacos and so I saw this place card and I wrote Trump's next move is on this note. If you zoom in, it says taco taco style. So, uh I think this is a a great buying opportunity where we are tactically. Let me share another screen here. Uh this screen is the price of Bitcoin. And what's happening is you have these Bitcoin whales that are consistently selling at around 125K right where this level is here. Okay.

That's that explains Stephen the point you raised earlier which is it seems like total market cap isn't rising while other asset classes are rising. So these whales are distributing at these levels. The question is how much supply is there and are they done selling? Now the flip side is this. Those people that are selling, guess what? They have a lot of cash, right? These are buyers. And what do they do here? This liquidation wick, they're buying.

Every buyer is a seller. So there's ample liquidity. And uh you know, we we bought into this liquidation. Liquidations are generally bullish, by the way. They're generally bullish. Um this is a massive massive liquidation. And I think the lows are in. Very simple terms. Are the lows in or not? Yes or no? Yes, they are. How how far ago in the rearview mirror is it? Yesterday. Okay. So, riskreward looks pretty good. The risk is just beneath where I am.

Reward is higher than that. Um, but I think it's a tactic. I think it's a tactic. What that means is you have to reassess, you know, some period of time later. can be a week or a month or three months and then revisit because you do have this selling pressure at 125k probably from Bitcoin whales that are looking at the four-year cycle etc. >> Okay. So let let's start to to wrap up and kind of in that vein ram I mean I want to ask each one of you like what are one or two things that you're looking for in in the days weeks months ahead either good or bad and and it could relate to the market. Uh, I know there's a lot of discussion and speculation on about who got blown up potentially and and sometimes it's not

necessarily the first blow, but it could be the second. Uh, so Rahm, let's just stay with you. You can finish your thought. >> Sure. Yeah. Look, I I uh I'm optimistic and bullish now. I think last week I closed off by saying sometimes do nothing. You know, like where we entered last week markets were overbought. There's indigestion needed. uh things were priced for perfection in many many areas. You had this clearing event on Friday that reset sentiment, reset positioning. People had the memory and trauma of tariffs and said, "Oh, it's back again." They hit market sell. Uh they hit the bid, VIX jumped up 30%, which is real palpable fear. That's real

fear. These are conditions that are similar to August 5th of last year at the culmination of Yenageddon. although different. It's always different. It was one day instead of a multi-week event that kind of built up. Uh so I'm bullish here. Tomorrow the big banks report like JP Morgan, the Bank of America, prediction. They're going to beat their numbers again. Prediction consumer credit will be healthy and fine. Consumer spending will be going up year-over-year. You'll see record mortgage refinancings coming out of Wells Fargo. The consumer is fine. Uh, and there's a lot of credit fear in the economy right now. If you look at like BDC's and private credit, private equity firms, uh, CLLO, uh, issuers, I think

you're going to start to see those start to stabilize and rally. So, yeah, I'm feeling pretty optimistic here. Earnings growth expectations for the quarter ahead are like 6%, we just came off a quarter of 12% year-over-year earnings growth. That's not going to stair step down to 6%. So PE people still have this PTSD. One other quick anecdote for you. I had a conversation with two friends in Switzerland this weekend. Their center left and they volunteered to me. They said, "Well, I own one stock and everything else is in cash." And there's a study that shows that if you ask people their political preference, it tells you their sentiment about markets and the economy and are we in a recession or not? This stuff. It's the correlation is very strong. So like they have Trump derangement syndrome. That's

what they have. They're friends. I love them. They're wonderful people. It's not a critique of their person, but you have to step outside your political views. Uh when you're making an investment decision, the point there is a lot of those people have cash. They're going to have to chase this market higher. So, it's another reason I'm bullish going into Q4. >> Got it. Uh Carlos, let's go to you. What are you looking for? >> I think high level on the markets, I would echo Rahm. I think I'm very positive. I think unlike I I kind of think the four-year cycles are are sort of over. We've we haven't had a four-year cycle going into u a rate cutting cycle. I think this time is kind of really different and crypto has a lot

of tailwinds across you know regulatory adoption uh things that haven't been true in the past. I think the two things that I'm really looking uh towards like next few months just like related to the Friday's specific events. I think one is whether it's any actual change in trader behavior. I think a lot of people got burned like uh really badly in Friday. I think most of these are have been cryptonative um traders in Wales. I actually don't think it was a large number of like the new retail that had been on boarded into crypto. I think most of those traders for the most part uh trade spot. I think most of the people trading pers are a little bit

more cryptonative uh more you know deep into the industry. I guess I'm I'm very curious whether we go back right back into leverage building up in per and people kind of you know behaving the same way or if this drives any change moves people towards either less leverage or different derivatives like options and different behavior uh there potentially. And the other thing I'm I'm kind of looking forward to is is just how exchanges react. Uh I'm curious whether yeah we'll see more coordination um potentially greater use of of insurance funds whether we'll see more insurance funds in DeFi. think something that was kind of missing uh on some of these uh centralized purpose exchanges

while they have some of these vaults that act as market makers uh and often times like step into like do liquidations they're not really insurance funds and uh oftentimes like because of their risk limit they won't take you know liquidations after a certain point and that's when ADL will kick in. I guess I'm curious to see whether we'll see the rise of of insurance funds uh in a bigger way. >> And YQ >> I I still feel like it's a big heat on all the small retails uh traders uh even some liquid funds especially for all coins and builders. it will take a long time to recover because like as as you can see right uh this um heavy um sort

of 80 or 90% down for most of the all coins. So but they are more like the small businesses uh in crypto. So they are basically the blood to really support the entire uh emperor for like for example the major coins like to really get uh male adoption. Um but for this time I just feel like a lot of these projects builders and traders got hit a lot and uh it takes a long time to recover and beyond that I feel like in the current crypto it's um it's a quite like sort of on two sides one side like on the small altcoins uh for them surviving is already super tough because

it's very difficult to get liquidity difficult to get users and difficult to get VC money on the other side is like this um crypto max 7 bitcoin ETH and Solana XRP they constantly got this wall street money for DAT and all the things so that's why if you look at the like overall market cap right um it doesn't change much because Bitcoin and ETH they are they are sort of ratio much clear much higher but the small ones like become lower and lower so I just feel like um after this it takes a long time for these kind of small businesses to recover uh for the next few months or next one or two years. But for the big

tickers or the major coins, I think they will eat well from the wall street and also the big institutions. >> Yeah, I I agree with with what all you guys said. I'll just add two quick things on my end before we wrap up. Um one, I forget who said it was either UQ or or Carlos. I'm curious how exchanges might reconsider listing procedures. Uh because especially for some of these altcoins, I mean, they already have stated procedures. They want to make sure that smart contracts are technically sound, that like the tokens themselves or blockchains aren't being used for fraud, that there is sufficient liquidity. But given what happened on Friday, I I think it makes sense for some of them to to reevaluate what that means. And two, we didn't get a chance

to get into this too much, but I I I think Lara is actually interviewing Guy tomorrow um on on chain, so she'll get into it. But it's really ironic that uh the DeFi I guess the the perp dexes were saved because they hardcoded um the uh the price of of USDE. And I mean obviously we there's plenty of room for criticism for how Binance did it, but just the idea that uh a DEAX was the one that centralized what the price was going to be and it saved them untold amounts of money, that's that's irony and I'm curious to see what that looks like.

>> Amazing. You know, that's a hack in a different situation though. >> Yeah. So >> that's a hack in the world where it actually does break the buck and then you stuff them with as much >> Yeah, exactly. >> Exactly. So with that um Rahm as always YQ and Carlos thank you for uh for joining us for this really interesting and timely discussion. Thanks to everybody for for watching and listening and we will we will be back next week with another episode of Bits and Bips. [Music]