Unchained - Bits + Bips: Crypto Had Its Reset. Will It Go to New Highs Now? - Ep. 924

Episode Date: October 14, 2025

Crypto just went through its biggest crash. In the wake of “Black Friday,” when $19 billion in positions were wiped out in hours, Bits + Bips hosts Steve Ehrlich and Ram Ahluwalia are joined by Carlos Guzman of GSR and YQ of AltLayer to dissect what really happened. Was it a coordinated attack exploiting Binance’s oracles? A failure of market structure? Or simply too much leverage waiting for a trigger? Or some combination of the three? The group breaks down how liquidity vanished, why hedges failed, how this flash crash echoed the worst moments of traditional markets, and why the industry urgently needs reform before it happens again. Sponsors: Aptos Hosts: Ram Ahluwalia, CFA, CEO and Founder of Lumida Steve Ehrlich, Executive Editor at Unchained Guests: Carlos Guzman, Research Analyst at GSR  YQ, Co-founder of AltLayer Timestamps: 🔥 0:00  Introduction and ads ⚡ 3:22  First reactions to crypto’s biggest crash ever 💥 5:55  The USDe depeg on Binance. Plus: coordinated attack or market failure? 🧠 12:57  Why Ram calls it a potential “zero-day hack” 📉 15:38  Are perpetuals the riskiest instruments in crypto? 💫 18:38  Huge spreads, no liquidity: where were the market makers? 🏦 22:59  The eerie parallels to a flash crash in U.S. equities 15 years ago 💀 25:01  How both longs and shorts got wrecked, and why perps fail as hedging tools 🔧 29:00  What crypto needs to fix its liquidity problem 🏛️ 33:34  How TradFi solved this years ago, and what crypto can learn ⚖️ 36:25  How systemic leverage makes every crash worse 📜 42:16  Why this proves crypto urgently needs a market structure bill 🚀 47:13  Why Ram says Hyperliquid came out as the winner 🔮 50:14  Outlook for prices and volatility in the coming days 🛡️ 1:00:04  Will insurance funds rise after this? ⏳ 1:02:18  Why YQ says it’ll take a long time to recover from the damage Learn more about your ad choices. Visit megaphone.fm/adchoices

I think many people kind of realize on Friday that perps may not always be the strongest or safest instrument. Sometimes, like, liquidity is reduced automatically before, like, market makers 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 hyper liquid? Is hyper liquid a winner or loser coming out of this? I'm optimistic and bullish now. Hi, everyone. Welcome to another episode of Bits and Bips at the show. where we explore crypto and macro colliding one basis point at a time. This is a very special episode just given what's happened in the market over the last almost 72 hours or so. Typically, we're trying to decide what we're going to talk about.

Dats, Trump, Fed policy, none of that is an issue today. We're going to discuss what happened on Friday, lessons learned over the weekend, and more or less how crypto is going to respond moving forward. Aptos is the no-compromise infrastructure for global financial markets, fast, reliable, and 100 times more cost-efficient than other blockchains. See for yourself why Aptos is the chain of choice for institutions, users, and developers alike at the Aptus Experience, October 15th and 16th in Brooklyn. But first, just a few quick introductions. I am your host, Steve Ehrlich, High Scribe of the Unchained Kingdom. I'm here, as always, with Ram Alawalia.

Master of Wealth, leader of Lumida, and we've got two very special guests. So let's introduce them quickly. First, we have Carlos Guzman, chief scholar of the C. Of the GSR Citadel. So welcome, Carlos. Hello, love the name. Carlis, why don't you just briefly 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 across exchanges, centralized exchanges and centralized exchanges in crypto, also big OTC desk and systematic OTC desk. And yeah, we partner with projects to provide liquidity and just also as a broader capital

markets partner across advisory, help with treasury management and a bunch of other places in the space, including as a big investor as well. So yeah, pleased to be here. And we also have YQ, commander of the roll-up armies at Altlayer. And a special thank you to Waiky for joining us because he's in Singapore, whereas right now 2.30 in the morning for him. So, Waiq, welcome. Yeah, thank you, Stephen.

Okay. As always, but especially true today, nothing that we say here is financial or investment advice. Please check out unchaincrypto.com backslash bits and bibs for more details and disclosures on that. And with that introduction, let's kind of just, dive right into it. Everybody was getting ready for the weekend. I had some big plans, and then Trump decided to threaten 100% tariff on China due to export restrictions on raw earth minerals, and all hell broke this. Ram, why don't we just start with you? What were some of your first thoughts and reactions? Right. So on Friday, around 10 or 11 a.m. Eastern Time,

Trump shared a tweet saying that he would raise tariffs on China, something like 100% or so that calls a sell-off in equities, which up until that point in time were up something like 1 to 2% on the day. So you had a nice rally. And then so equities start to slide, close down the day, 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 guests will unpack it for us is

you had forced liquidations that were done algorithmically, just autonomous code that was running and seeking to protect the network by liquidating positions. You know, you had faulty oracle set up at exchanges that were pointing to the wrong reference spot data. And kind of reminiscent of what happened with 1987 crash portfolio insurance where you had a mechanism. It was nominally designed to protect investors, but actually had a pro cyclical phenomena. So it's this classic tale of a crypto speed running banking and markets history.

You know, in 2021, it was re-hypublication with the blowup of Celsius and Genesis and these other lenders. So, crypto learned that you shouldn't re-hypothecate unless you're a bank with a lender of lessors or an FDIC insurance. So here's an next lesson. It's 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 despondency that was out there, you had people that lost their life savings.

They were acting in their minds prudently, too, you know, a dollar cost. average over several years, but they were forced liquidated. They might have had some leverage and this is all in the Perth market primarily where this pain was meted out. The spot market also of course had some volatility, but not nearly as much as what you saw in Perps and especially 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.

possible. Speaking of the winners and losers, I mean, YQ, you had a really interesting article on X. There's a lot of discussion, I guess, in the air supply. Was this a coordinated attack? Did CZ try to take out hyperliquid?

But it looks like certain attackers, if you read the T leaves the right way, they nuked ENA or USDA on on Binance, led to a concentrated crash on certain tokens because of a window of opportunity related to oracles on that particular platform, but then they were able to take advantage of on hyperliquids, the tune of, I think, $192 million and caused something close to $10 billion

in liquidations on hyperliquid. Can you kind of just walk us through that? 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 as you mentioned, right, there are a lot of coincidences like after I really dig into a lot of details regarding this kind of the biggest crypto liquidation event. Like regarding the timeline, right, as right, as right mentioned, but here I would just use the Singapore time zone as the reference. So actually the market started to behave after this kind of announcement on the tariff news around like 5 a.m. in

Singapore time on Saturday and then after that basically the crypto market started to behave like basically there are a lot of sort of shorts and basically the entire market plunge a lot until like sort of a 520 if you look at the chart right. no matter for the majors like Bitcoin, ETH, some other oil coins, right? And basically, drop like dramatically by this sort of 30%, 50% or even that sort of 99%. I was somehow awake at that time. So basically, I literally watching this kind of waterfall drop for most of these all coins. And then it's sort of like the first round of liquid.

Like from the other reports, like some like sort of there also this kind of liquidity vacuum basically due to a lot of traders market makers be withdraw the liquidity from it and it's also because like the market reaction was huge and basically it also triggered no matter the CX ADL on the auto delveraging Macandum all these kind of like this kind of like Dax, Perp-Dex, like hyperliquid is ADL. So then, like sort of around is 543am. Basically, the USDA and the WBETH and also B&SOL started to collapse. Around that time, around like sort of 16 million USD equivalent, like sort of USDA,

dumped on the market. Of course, there are multiple reasons, right? Like, there's some reason I say, okay, it was caused by the first round liquidation, and a lot of positions or collectuals 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 costs the deepak of USDA. And after that, because, like, on finance or some exchanges, right?

use the WBETH and BN Seoul as a collateral for their margin. So in that case, like further costs this kind of loop of liquidation. Until I sort of for the next half hour or one hour, the entire sort of market structure that basically is completely off. And why we feel like 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 depagging of US DE around like 543 and 544 yeah and beyond that why we like sort

out in the posts all that sort of tweets right I feel like probably also can be a coordinated tag is because like around few days ago back in 6 October Binance a slide, they will start to do some adjustment of this Oracle for the B-N-Soul and also WBETH, and which will be conducted around the 14th of October. It's just like so coincidence, like just between these few days, right? And then, like, it's not just about the first liquidation of all coins, but the second liquidation, like, directly target, like, sort of of the three assets, USDE, BN, Seoul, and also the WBETH.

It's basically exactly sort of the assets in the announcement. So that's why we feel like probably can be a target, a coordinate attack on it. And then in the third, like sort of article I mentioned, right, somehow it's related to this Oracle problem. We're quite familiar with the Oracle for the Dex, right? Compound RV and the other things like for C-EX especially for this specific case, for example, USB-E-In-Sol and also WV-E-D-H. Before the adjustment, partial of this price index is associated with the sport price.

So that's why in the second liquidation we can see that when sort of the price was down And basically, unless you have a lot of liquidity to buy the back, otherwise, you're the price down, the Oracle, I mean, the market price, the down further. So it's really cost this kind of cascading liquidation. So that's one of the reasons we feel like it can, the root cost maybe just about the Oracle. There were large short positions placed prior to the sell-off. and you can see these 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 but the question is like who would be the actor here it seems like you know the core issue was that finance 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 Binances, the spot prices on their order book, which they're using for risk management and 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 cybersecurity 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. I'm in conspiracy tinfoil camp too on this one. It sounds almost something where it came to like a flash loan type type attack. Because like there was no vulnerability that was exploited as you mentioned,

Rob, like they went right through the front door and used publicly available information to take advantage of something. I mean, it gets tricky if I mean, as we're all wearing our tinfoil hats, they're conspiring to drive down the prices 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 finance sweat in years. But we'll see. I want to get kind of thing out with an apology. Don't forget. Just so sure they're 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, they're still not clear. Anyway, go ahead.

Yeah, I mean, it's one of the things where, I mean, like, Occam's raised your, what's the most likely scenario or most likely explanation? And, NYQ, you even mentioned this in your report. Like, there is a way to read all of these different clues and say it was not some sort of conspiratorial attack, but it was just a couple of opportunistic actors or just a perfect storm of events. But it's always fun to wildly speculate. So let's let's do that as well. Carlos, I want to kind of get your point of view in here. And like, it's really interesting you're at GSR. I mean, you kind of fit yourselves as like the capital markets partners and I'm sure you

do plenty of business at finance. I mean, from your point of view, like what was going on at that time? And like 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. I mean, it was, I think Friday was just a perfect storm of all these risks. I think you got, yeah, I think right after like Trump tweeted, you got like a big market

dump and then just an incredible wave of liquidations in perps. I think we just had, we just seen lots and lots of leverage accumulate in perps. and I think just like when markets are falling, I think the natural reaction, I mean, for biggest digital players like GSR, it's extremely important for us to take risk management extremely seriously. And I think many players like bit that at the top. And we do that across like many venues and across many different instruments. I think many people kind of realize on Friday that perps may not always be the strongest or safest instrument. I think part of the story of Friday is learning about counterparty risk and exchange risk. For instance, 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, solvencies, many people's short positions.

also got closed, oftentimes, you know, at P&Ls much lower than they would have expected. I think this has the potential to have realized pretty significant losses for funds running long, sharp, short strategies, funds running like delta neutral strategies. Market makers like GSR, we obviously, we run like delta neutral strategies, but we're not only using perps. So, I mean, fortunately for us, we were not majorly affected. But it can be the case that other kind of big funds might have been. There was a rumor that you had the destruction of one or more of these market makers or the weekend. You would be the one of the first to know. Yeah, I mean, I've only seen rumors so far, nothing really concrete or substantial.

Right. But for market makers that took, you know, I mean, market makers like GSA are very much aware of like all these, all these mechanisms that can happen and take risk management. 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 ask spread on assets with 30%. It's insane.

Okay. Put that into perspective. If you want to get into position, you're paying 30% of, 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 the situation is that there's limited depth

of order book the farther way you go from the prevailing market price. If you think about like how Dex's work, like Uniswap, for example, they use these constant bonding curves to create liquidity. But bombing curves 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. I'm looking fancy about that. And, you know, I guess that system worked. That system worked.

But clearly, if you're seen 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. And actually, I want to just build on that, Carlos, before you respond to. I think there's a bigger lesson here to learn for people watching to understand liquidity, especially for alts. I mean, not the Bitcoin and Heath and Solana, but I mean, and I'm not even just talking about

what acutely happened on finance, but it's hard for people watching to understand order book depth, especially when exchanges and tokens employ market makers that do a very legitimate, play a

very legitimate role in trying to maintain early markets, but something like this happens, and 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.

What are some of the lessons they can learn to understand and make better decisions on where to trade and avoid some of those, that slippage that Ron was alluding to? Yeah, for sure. So, I mean, getting a bit into Ram's point, it was, probably was extremely chaotic. I mean, I think we saw a lot of exchanges also

kind of start to not operate, like, fully well. Orders were not executing APIs. We're 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, oftentimes liquidity is reduced as market makers are basically managing risk or quoting wider spreads. Because oftentimes it's without information on what exactly is happening, market makers can't quite confidently quote at a certain price before you fully know, okay, is this some sort of exciting as major event? Is this more like, really like the price of a specific asset before like information really comes through,

before things are clear? And market makers can once again confidently start quoting prices. Market makers tend to look, you know, in periods of uncertainty. And oftentimes this is, just coded into bots and automated algorithms. So sometimes, like, liquidity is reduced automatically before, like, market makers can even 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. So, yeah, this is all just a vicious cycle.

So this happened in the U.S. equities market in 2011. There was a flash crash, for those I remember. And the biggest critique of the U.S. equity markets after the passage of Reg. 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 happened that Reagan MS was passed to create competition. So you had the explosion of other exchanges like ARCA, building on success of like Instantat and Island, archipelago, and dozens of other exchanges.

And it also led to the rise of high frequency trading. So the criticism was that Reagan and MS created phantom liquidity. Phantom liquidity. What is phantom liquidity? So it's a fact that execution for U.S. equity investors better today and 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 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. 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 some people look at this very critically and say, how look, crypto is just a bunch of nonsense. Well, look, I mean, this did happen in the U.S. equity market too. There was also, you know, there are examples in the U.S. equity market where things like this happened. There are issues that have happened. And then there's a market response. There's an investment infrastructure. Players learn. and then the market heals and moves on. I want add a little bit like sort of stuff here

because I've been crypto over a decade since 2015 and I have a lot of friends running liquid farms and also some of the their triggers either on the CX or the sort of perplex. So right after this kind of crash, I have a bunch of calls with them. some of them got heat. The thing is like, as Stephen just mentioned, right,

the thing is like previously people feel like Perp is super useful. And they do hedging, like sort of the lungs, these kind of all coins and do short, sorry, the lung like sort of Bitcoin and do short on all coins. For example, land on Bitcoin, short on Dodgecoin. But during the crash, to the ADL, their short position was forced to close. So in that case, there are no more sort of hatch.

And due to whatever reason, glitches of the server, whatever, right, you couldn't put bees on time. So that sort of like basically during the crash, any hedge no longer working. So what you can do at that time, like basically try to hold all assets in spot. So that's why a lot of my friends, I've heard this. kind of crash, they told me that don't use purplefogic hygiene anymore. Because another issue is still back to the Oracle issue. A lot of these CX, DX, they are using the spot price as a market price.

And as I mentioned, right, there is basically no liquidity during the crash. And you can easily manipulate the spot price. further liquidation from the other collectuals, whatever, it further drop that sort of the mark price for PURP. So in that case, you can't do hedge and you can only hold that sort of all the assets. Beyond that, based on your feedback, right? Another thing they mention is like,

so basically the liquidity or the surprise on like sort of CX or DX is not trustworthy. As Reggie mentioned, right, you can have some phantom or ghost sort of spreads. And once there was a crash happening, right? It's basically all liquidity withdrawn. And like one thing, like probably we can trust is AMF. Because most of the LPs on chain and you count like sometimes the chain like sort of got stuck, right? You couldn't really withdraw the asset immediately.

So the liquidity just stick there. But in general, I just feel like the main issue is still like we need more this kind of liquidity around this kind of crash. Of course, it's super risky. But like I just feel like if we don't have enough liquidity, like basically around this kind of crash, there are so many places can be manipulated. Before we move on, we do need to take a very quick break so we can hear it from the sponsors to make the show possible.

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Experience October 15th to 16th in Brooklyn. So, YQ, just to follow up on what you said, and I want to get Carlos' take on this too. What can be done to improve liquidity? I mean, obviously, as the industry grows, There should be more market makers, more traders, everything, but especially for some of these long-tail assets that I think it's fair to say, we'll face these issues time and time again. Are there ways to better manufacture liquidity, or is it more an issue from exchange execution, that, especially on the CEX side, that they do a better job of stepping in, maybe having bigger insurance funds, or, is it more an issue from exchange execution, that, especially on the CEX side, that they do a better job of stepping in, maybe having bigger insurance funds, Or is it a matter of having more transparent ADL policies? I'm not sure. What do you guys think? So a few things I can sort of share because I'm also writing some other sort of articles

on further investigation into some details of this liquidation event. So one thing, I think for CX or DX, this should really carefully. select sort of the assets into their spot and the perp sections. Because for some of these assets, right, if they don't have enough liquidity themselves, they are super easy to be manipulated. No matter is sort of the spot price or this kind of the perp or the market price. The issue is not just pure about liquidity. that since this small asset,

chosen by the CX, there are always a lot of these kind of whales. They want to make more. So they want to manipulate the price. And in that case, like if you sort of, because a lot of users do understand what kind of token it is. They just know there's a ticker, it's pumped,

and then they will just follow. So that sometimes really hurt. And beyond it, as Stephen you mentioned, right, the ADL. ADL is not perfect everywhere. Because once ADL is triggered, that means it's already in the extreme situation. And basically, hygiene is no longer working.

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 24-7 team, like sort of can really pull the bees immediately. So of course we need more transparency for the ADL for most of CECS ADL ADL mechanism is not transparent we don't know like sort of what kind of mechanic they are doing for example for a lot of my Twitter friends they don't know

when your shop position got closed and then like then how about their lung position kind of long position got that sort of closed simultaneously that that was not real it's basically all their long position got liquidated instead of like ADL. So there's so many like sort of uncertainties here and there. I just feel like there's multiple ways we can fix it. One is like probably like GSI or the other market makers. They should really figure out ways to provide enough liquidity during the crash. 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.

For example, the US DE, Guy mentioned that it's perfect fun of chain. You can redeem whatever like $20 billion if you want. But the issue is like on-chain side, the CX side, they have most of the volume. They have to rely on the spot price because people are trading. They don't have the direct way to redeem on-chain. So that's another, like, Oracle issue. We need figure out with the best way. Of course, the ADL, as you mentioned, right? There's no perfect ADL.

Every exchange has its own ADL. Some exchanges I learned, Perp Dax. They don't even have ADL. So you should literally be like sort of responsible for your own, like, sort of positions. Yeah, these are all the new things. If you got purpose, do very new. So I believe, RAM probably again, get more like, sort of sharing based on the web through experience.

I don't know if you can share that. Do you see that, Stephen? So this is a post from a friend of the show, Chris Perkins. Chris is a partner at CoinFund. And he's a part of the subcommittee that advises the CFTC on digital assets. The CFTC regulates U.S. derivatives and more coin houses, including clearing houses like ICE, which is, I believe, the large. largest derivatives clearinghouse globally.

So Tradfi has solved this problem. That's the headline statement. And the way it works is every clearinghouse is regulated to have five layers of protection. And Chris lays them out here. So the first layer protection is called variation margin. So that's when the price moving against you, you've got a post margin to get back to acceptable levels of leverage as governed by the system. 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 clearinghouse has its own equity layer cushion so it can contribute to this as well. 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 clearinghouse contribute to this fund in the same way that banks contribute to the FDIC insurance fund. Those contributions are made via different mechanisms, including like an assessment. So an assessment, as you passed a hat around, you say everybody pony up, we got to fix this whole. 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. What they did is they looked at like resolution processes for these assets have an auction for the process. So Trotphi solved all this. Now, Chris goes on to say, yes, in other words, socialism, which is kind of a funny response here. All right.

That's actually, I would call that like good regulation. That's good regulation. Now, to make that come together, you need a framework to govern these exchanges. Obviously, Binance is international. It's outside the scope of U.S. regulation. So we've spoken, I think, about two of the three big causes so far at some length. I mean, one, lack of liquidity or issues with liquidity.

We've discussed some of the break-the-glass scenarios that exchanges have to go through and problems there. I want to just briefly touch on leverage, too, because, like, all of this was, I mean, that was sort of the stack of dry leaves or sticks that was able to be set up. plays. And there's some interesting narratives going on. I mean, for one, I mean, what was it? Like, like, how much, yeah, like, $65 billion in open interest was news, which is a huge number. But, and this long bull market has kind of 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 half X leveraged or two X leverage, which may not, it's a big difference from being 30 or 50 or 50 or. or 100x. So I'm curious, like, what you guys think. Maybe, Carlos, you can jump in here first. How should people think about leverage in crypto?

What are some, like, like, how unhealthy do you think leverage was before all of this happened? And like, are there warning signs? Are there things that people can do? So that, or is it just going to, history going to repeat itself where leverage just crips up and up and up during bullish periods until there's sort of, it's almost like like burning acres in a forest to allow for regrowth. What do you think? Yeah. 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's, you know, there's lots of speculators of crypto and DGens. And you know, I mean, that's, that can be largely fine. But I think that creates

a situation where exchanges are incentivized to offer greater and greater leverage to attract speculators and provide like good well you know like the experience that they're seeking which is you know high volatility potential to to make a lot of money very quickly but I think we've gone into a situation where exchanges offer a lot of leverage and there's potentially a lot of traders taking on a lot of risk that oftentimes you know, it doesn't really come back and bite them in a big way until there's potentially a big, like, Black Swan event. Or what happens is a lot of carriers are taking, you know, leverage in ways that individually might seem rational, but then when there's a big market crash,

you get like a systemic risk where everything gets correlated because 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 them like uh their long position uh gets liquidated so i think it's it's kind of a coordination problem uh i mean either there's going to be a behavior change where people might not take that much risk. I don't really count too much of that happening in crypto.

Or we find ways to coordinate across exchanges to find ways of self-regulating or finding some of these other mechanisms that can improve liquidity. One other thing I was going to mention that could be a mechanism that crypto can explore is circuit brokers. These can provide

pause in trading while everyone just like stores up. How does what happen on a permissionless 24-7 market though? They're all great, by the way. They're all great, but this one like. Yeah, and as our circuit breakers have been talked about for years. I mean, they're centralized exchanges. I can certainly understand it. But I mean, Carlos, I'm sure you know this as well as anyone.

They're almost anathema in Texas. But I'm curious. Yeah, you can't trade on your exchange. But then the spot price represents your collateral value keeps going. against you. And now you're saying, I have more risk, right? Or you have a position in exchange A and a position exchange B, and they're hedging each other. You're doing some cross-market arbitrage. Now you're frozen here. It could actually be creating a risk. So I like the general concept of what you're saying, especially the self-regulation. That won't happen, unfortunately, but it's really what's

needed. The NASD, 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 pink sheets market in 1950s, like a 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 byside. I believe it's led by the former president of Bridgewater. That makes sense because the market ultimately is about serving investors.

It's about investors. investors. 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. There has been no self-regulatory organization. There's no incentive for anyone to build one. They need to do that, though, because if this were to happen in the U.S. in a regulated jurisdiction under a different administration, and if retail investors lost a lot of money, then you'd have the heavy hand of government come down and force regulation. Well, building on that, Rahm, I mean, it's kind of interesting that this happened, and we're having this conversation.

And 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 YQ, you're in Singapore. But we're having this conversation while the government is closed and anyone who sends a message to the SEC get a very nice reply saying we are not monitoring our email accounts right now until due to appropriations. but it's a circuit but look if you did email them they still want to respond

Stephen come up nine months to see what you got me fair enough nine months we go by and they would say we acknowledge your request

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 dotgov website and fill out another forum

that's what happened but any point taken wrong but anyway like we're in the middle right now of what appears to be intense negotiation notwithstanding maybe actually a defy hiccup on the part of Democrats, which perhaps maybe is much

more relevant now than even was a couple of days ago. But we're trying to negotiate market structure legislation together. And this is a perfect example of why it's so critical. And that the discussions about it have a lot more to do within what kind of token is a security, what is a non-security? I mean, handoffs, we're doing. between the SEC and CFTC, these types of resolutions when there's periods of acute stress. Like, as Ram, you were saying, this was solved for the most part in Tradfai. This was, I guess you can make an argument the worst day in Cryptos history. So it's not the norm, but a lot of people lost.

I mean, I know that the $19 billion liquidation number doesn't actually mean $19 billion was lost. but this impresses the importance of getting regulation. And I think also underscores how difficult it could be to get it done by the end of the year, which is what people want. I haven't read clarity 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 these are just some extra stuff. crypto compared to 3-5 because like Stephen just mentioned about like I thought how

what are the matters we can apply right the thing is crypto especially for perpetual right there's no clear definition in the US I mean even Coinbase has a perpetual it's like five or ten years of futures you know right is it's something completely new and then for this time I think one of the root cause causes is it's really about this, we call cross-margin or unified account. So basically, all your assets are treated as a collateral when you open long or short positions. And that means, like, even you open, like, sort of 1-X lung during this kind of market crash, right? It's basically everything, all your position, all your sort of assets in your unified account gone.

even 1x. So because it dropped like 99% it's super crazy. And beyond that, we also have something called this, 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 deported UIDC, get the UIDE, and then we basically, we can learn like UDE, get UIDC, and then we deported UIDC, get more UIDC,

get more USB and we do this kind of looping to get this extra API. It's not like this kind of perpetual, it's a lending, but as you can see, right, we can get as much as high as like sort of three or five X leverage. Because a lot of user treated like the, it won't depend. It's always one-to-one mapping. But in reality, like, for example, in this kind of market crash, right, it is no longer working. There is a lot of a hidden average.

here and there, especially in crypto. There's a lot of new stuff. I think it's good. We can have some regulation. But at the same time, I think right now immediately, we need to figure out ways to really alert users, like for all different risks. They are sort of facing.

No one's reading the Yula, the end user license agreement. Disclosure is not the answer to this complex question. When you have a user that's looking for 100, leverage as the primary value proposition on the perp. They're not like, let me look at page nine of the disclosure, right? But what do you think about hyperliquid? Is hyperliquid or a winner or loser coming out of this? At the beginning, I feel like, I can't say it's a win or or loser, but like all the top of this 19 billion, I saw liquidation, like 10 billion from hyperliquid. That's why from their, they call HLP, it's basically their vote earned like 40

million dollars immediately. So of course, people think that it's good for hyperliquid, but when you think about for the users, right? A lot of my friends got liquidated due to the ADL, McKenna. At the same time, ADL,

like sort of stock stock stock 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. So I think for users, it definitely is not good. But of course, hyperliquid show that it's, pretty stable during this event.

I think they're a winner. I mean, hyperliquid, yeah, what you're saying is like they made money. Unfortunately, they made money through this high volume of transaction activity. Customers. Their own users. They're users. That's the bit. Now, but on the users, again, it's a derivative.

So they were winners and losers on that side. These are derivative products. So derivative, this is zero sum transaction. The unfortunate part is that their users were carried out and liquidated the exact worst time and it wasn't in their control. That's what makes this terrifying. But there were, you could call it like responsible players and made good decisions, but due to market structure issues, they were liquidated.

That's done. 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, that's, that's my view. But I agree. Like in your report, 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 gave out the statement. They said, hey, we 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 invention of liability. We have reflecting. We have many lessons to learn.

and they've since updated kind of the whole Oracle mechanic works. Well, I think them paying $283 million is a certain admission of something. But I know you mean Rahman in like the legal sense. And who knows? I'm willing to bet there are plenty of other people that aren't included in that 283 million that might be looking at other forms of recourse. And I'm curious, like the phrasing the winners and losers, because, I mean, hyperliquist 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... It's a friend. Yeah, it's... So, Carlos, let's look ahead and let's talk about what the market's doing today. I know we sometimes can joke about Taco Trump. 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 that basically will figure a way out of it. and the market seems to be taking him at its word. Tradfies up. Bitcoin, as we're recording this, is at about $115,000 and change. ETH is back up above $4,200. B&B is above $1,200. And the market seems to, it hasn't obviously gotten back all of what was lost on Friday, but it's certainly recovering.

What are you seeing right now and kind of like what are some of your expectations in the ensuing days, assuming that there's not another big shock. I mean, I fully expect we'll see more of a return to normality. I mean, notwithstanding any further just get out on like the target side and like that, you know, happening again. But it seems like, you know, over the weekend, the Chinese government kind of clarified that, you know, their announcement or like their restrictions like rare earth metals exports like were like kind of like potentially miscommunicated or misunderstood by the u.s.

government so we saw like the trump administration kind of where the weekend also walking back the threats of 100 percent like tariff restrictions which i think like really really called markets so i mean i think we're with with that past which is it's a little bit ironic because tariffs don't really have a direct impact on crypto. If anything, 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 and other assets there. But notwithstanding, I mean, we know crypto's height correlated with equities.

And I think, like, the response was basically just a similar reaction to what happened in April and everyone's being very much primed to react negatively to tariff news. But I think it seems like things are largely back to normal on the trade side. I mean, there's still some uncertainty on exactly how the agreements within the US and China will play out. I think largely we have a lot of tailwinds in crypto and notwithstanding those relationships once again, you know, flaying. I think we can expect the market to kind of keep recovering and get back to pretty much where it was.

I mean, Ram or Wiki, do you guys have any thoughts? I mean, one chart that I had been paying attention to was sort of like plotting, 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, I mean, crypto has been propelled by Trump administration, a lot of positive stuff coming out of D.C. The DAT narrative, you know the DAT narrative, and we've explored this ROM, isn't everything it's tracked up to be because a lot of these big raises that we found don't necessarily represent net new buying. And perhaps it was a little bit of a facade.

So perhaps like the market was sending us signals of wheat. or skittishness in the event of a bearer stimuli, which we saw in spates. And granted, it was accelerated because of the acute issues of finance and stuff that we discussed. But I wonder if this is going to be a warning sign for some additional retrenchment and hedging, even if the market sort of like goes back on a similar path because people don't necessarily want to get burned again. Like I wonder if that's one of the bigger takeaways from what happened. Rom, you disagree. Go ahead. Can I make my Nothingburger comment?

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 landing in Newark by the evening, my phone is blowing up with Bitcoin down 5%. I'm like, well, I've just seen all this price. These are just notifications when broad price moves out. It would happen pretty while, but I was at the 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 I think this is a great buying opportunity where we are tactically. Let me share another screen here.

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 explains, Steven, 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 work, they're buying. Every buyer is a seller. So there's ample liquidity.

And we bought into this liquidation. But issues are generally bullish, by the way. They're generally bullish. 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 far ago in the Riverview mirror is it yesterday? Okay. So risk reward looks pretty good. The risk is just beneath where I am. Award is higher than that. But I think it's a tactic. I think it's a tactic. What that means is you have to

recess, you know, some period of time later. It 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 Wales that are looking at the four years cycle, et cetera. Okay. So let's start to wrap up and kind of in that vein, Rob, I mean, I want to ask each one of you, like what are one or two things that you're looking for in the days, weeks, months ahead, either good or bad. And it could relate to the market.

I know there's a lot of discussion and speculation on about who got blown up potentially and sometimes it's not necessarily the first blow, but it could be the second. So, Ron, let's just stay with you. You can finish your thought. Sure. Yeah, look, 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. Things were priced for perfection in many, many areas. You had this clearing event on Friday that reset sentiment, at reset positioning, people had the memory and trauma of tariffs and said, oh, it's back again. They hit market sell. 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 Yen

Mageddon, although different. It's always different. It was one day instead of a multi-week event that kind of built up. So I'm bullish here tomorrow. The Big Banks Report, like JPMorgan, 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 refinancing is coming out of Wells Fargo. The consumer is fine. And there's a lot of credit fear in the economy right now. If you look at like BDCs and private credit, private equity firms, CLO. issuers, I think you're going to start to see those start to stabilize and rally. So, yeah, I'm feeling pretty optimistic here.

Ernie's 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 stare step down to 6%. So 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. So 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. 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 when you're making an investment decision. The point there is 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. Carlos, let's go to you.

What are you looking for? I think high level on the market, I would echo ROM. I think I'm very positive. I think unlike, I kind of think the four-year cycles are sort of over. We haven't had a four-year cycle going into 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, things that haven't been true in the past. But I think the two things that I'm really looking towards the next few months, just related to the Friday's specific events, I think one is whether there's any actual change in traitor behavior.

I think a lot of people got burned, like, really badly in Friday. I think most of these have been crypto-native traders in Wales. I actually don't think it was a large number of like the new retail that had been onboarded into crypto. I think most of those traders for the most part trade spot. I think most of the people trading perps are a little bit more crypto-native, more, you know, deep into the industry. I guess I'm very curious whether we go back right back into leverage building up in perps 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 there potentially. And the other thing

I'm kind of looking forward to is just how exchanges react. I'm curious whether, yeah, we'll see more coordination, potentially greater use of insurance funds, whether we'll see more insurance funds in defy, I think something that was kind of missing on some of these centralized purpose exchanges, while they have some of these vaults that act as market makers and oftentimes like step into like due liquidations, they're not really insurance funds. And oftentimes like because of their risk limits, they won't take the, 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 insurance funds. in a bigger way. And YQ.

I still feel like it's a big heat. All the small retail, traders, even some liquid funds, especially for all coins and builders. It will take a long time to recover because, like, as you can see, right, this heavy sort of 80 or 90% down for most of the all coins. So, but they are more like the small business is. in crypto. So they are basically the blood to really support the entire emperor for like for example the major coins like to really get a man adoption. But for this time I just feel like a lot of these projects, builders and traders got hit a lot and it takes a long time to recover.

And beyond that I feel like in the current crypto, it's a quite like sort of on two sides. One side on the small all coins, 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, it's like this crypto Max 7, Bitcoin, ETH and Solana XRP, they constantly got this world free money for the A.T and all the things. So that's why if we look at the overall market cap, right? It doesn't change much because Bitcoin and ETH, they are a total ratio much higher, much higher, but the small ones like become lower and lower.

So I just feel like after this, it takes a long time for these kind of small businesses to recover 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 agree with what all you guys said. I'll just add two quick things on my end before we wrap up.

One, I forget who said it was either UYQ or Carlos. I'm curious how exchanges might reconsider listing procedures because especially for some of these alt coins. 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 think it makes sense for some of them to re-evaluate what that means. And two, we didn't get a chance to get into this too much, but I think Laura is actually interviewing Guy tomorrow on chain, so she'll get into it. But it's really ironic that the defy, I guess the prep dexes were saved because they hard-coded the price of USDA. And, I mean, obviously, there's plenty of room for criticism for how finance did it, but just the idea that a Dex was the one that centralized what the price

was going to be and saved them untold amounts of money, that's irony. And I'm curious to see what that looks like. You know, that's a hack in a different situation, though. That's a hack in the world where it actually does break the buck and then you stuff them with the much. Yeah, exactly. Exactly. So with that, Ram, as always, YQ and Carlos, thank you for joining us for this really interesting

and time of discussion. Thanks to everybody for watching and listening. And we will be back next week with another episode of Bits and Bibs.