The dramatic cryptocurrency selloff over the past two weeks has exposed the dangerous downside of the leveraged trading that previously fueled massive gains in digital assets. Bitcoin, which reached an astonishing high above $126,000 in October, has now lost roughly 27% of its value, trading around $92,000—its lowest point since April.
The Double-Edged Sword of Crypto Leverage
This year's crypto rally was significantly powered by debt, with traders increasingly using leverage to multiply their potential profits. Investors now have unprecedented access to complex wagers, with some platforms allowing them to put down just $1 of their own money to control $100 worth of Bitcoin. While this strategy can generate windfall profits when markets move favorably, it becomes devastating during downturns.
Daily total liquidations on crypto exchanges reached a record high in October, according to data from CoinGlass. The surge occurred after President Trump's unexpected tariff announcement against China triggered a widespread crypto selloff, forcing exchanges to close out underwater positions held by traders who couldn't meet margin calls.
Real-World Impact on Traders and Companies
The pressure on leveraged traders has become a central theme in crypto's recent decline. Individual investors like Kevin Wan, a 33-year-old who has traded cryptocurrencies since 2013, have experienced both sides of this volatility. Wan successfully shorted Bitcoin when it reached $106,000, using 20 times leverage to borrow on a crypto exchange and ultimately making approximately $120,000 as prices fell.
Meanwhile, the crash has severely impacted crypto-treasury companies that borrowed money or sold stock to invest in digital assets. Strategy, a pioneer in using corporate funds to accumulate bitcoin, has tumbled 29% in the past month, while BitMine Immersion Technologies, backed by Peter Thiel and run by Tom Lee, has fallen 35%. Both stocks have significantly underperformed Bitcoin itself, which declined 13% during the same period.
The Resurgence of Risky Crypto Products
Despite the recent losses, complex crypto trading strategies continue to expand in the U.S. market. The re-election of President Trump has ushered in a more crypto-friendly regulatory environment in Washington, enabling greater access to products that were previously limited.
This summer, Coinbase—the largest U.S. exchange—launched perpetual futures, financial contracts that never expire and allow traders to bet on digital tokens with up to 10 times leverage. The Cboe plans to launch bitcoin and ether continuous futures with 10-year expirations in December.
Crypto lending is also making a strong comeback after many lenders collapsed during the 2022 market downturn. The dollar value of outstanding loans from centralized and decentralized lending platforms ballooned to a record high of around $74 billion at the end of September, exceeding the previous record of $69 billion set in late 2021, according to Galaxy Digital research.
As Nicolai Søndergaard, a research analyst at crypto data firm Nansen, explained, "In the end, it really comes down to the fact that you can invest with more means than you have, but it also means that you will get punished for not managing your risks accordingly."
Despite the recent wipeout of leveraged positions, many traders anticipate Bitcoin will recover. Jake Ostrovskis, head of over-the-counter trading at Wintermute, noted that without regulatory caps on leverage, the current trading environment is unlikely to change significantly.
