SignalPlus Macroeconomic Analysis Special Edition: Get Liquidated

This is the most brutal liquidation day since the FTX collapse... The automated deleveraging algorithm of the Centralized Exchange wiped out $19 billion (or far higher than this value) in profits and losses, and the withdrawal of market makers caused altcoin prices to drop to zero... This brutal Friday close is needless to say for crypto assets traders and macro investors.

The China-U.S. trade truce has abruptly ended — President Trump responded with fierce rhetoric to China's latest export control measures, shattering market tranquility. This set of control measures has shaken the market with its unprecedented complexity and comprehensiveness. Coinciding with the long weekend holiday in the U.S. and Japan, the market experienced a flash crash before Friday's close, causing the Nasdaq index to drop 4% in a single day, with many alts dropping to zero.

This storm made the crypto community deeply aware of the ADL mechanism (automatic deleveraging), which is akin to the maintenance margin system in traditional finance. Although the theoretical logic is self-consistent, automatic stop-loss becomes ineffective in a liquidity-drained gapped market — when the order book has a vacuum, prices can drop sharply, nearing drop to zero. What traders often overlook is that market makers collectively disappear in a one-way market, causing the price discovery mechanism to fail. At this time, the automatic deleveraging system will only mechanically execute liquidations, forcibly closing positions regardless of how low the buy order price is, forming a price decline acceleration 'reflexive spiral.'

Adding insult to injury, the surge in data flow has caused the exchange systems to overload, and the delayed data transmission and order congestion have further disrupted the automatic clearing mechanism. This disaster has not only swept through mainstream centralized exchanges but has also spared decentralized exchanges — Hyperliquid leads the liquidation leaderboard with $10 billion in on-chain evaporated liquidation amount within 24 hours. Liquidity black holes do not care whether your assets are stored on-chain or off-chain.

In the traditional financial sector, circuit breakers can alleviate such crises by transferring part of the losses to the exchange, which requires the establishment of a reserve/insurance fund similar to the Federal Deposit Insurance Corporation. However, this move will increase trading costs for centralized exchanges and lead to a contraction in leverage (this is also one of the reasons why cryptocurrency exchanges can offer higher leverage than the CME), further contradicting the crypto market's valued characteristic of "7×24 hours" continuous trading. Everything in the world has its trade-offs, and we expect this liquidation event to trigger a re-examination of infrastructure development in the industry, should cryptocurrencies continue to advance the institutionalization process.

Looking ahead to the market, benefiting from the fact that neither the US nor China has further escalated the conflict, combined with the long weekend effect in the US and Japan, there was a technical rebound in the market on Monday. Although the mainstream view is that the recent disputes are merely bargaining chips before the "Xi-Trump meeting" (currently in doubt), we believe that the theme of macro decoupling has thus accelerated. The upgraded rare earth ban is by no means a usual provocation, but rather highlights the diminishing effectiveness of the US's counter-tariff measures. The short-term consensus is that both parties will cool down the situation (signs have already appeared over the weekend), and asset prices are expected to welcome a breather. However, given the deep damage to the profit and loss structure, as well as the market dominated by Bitcoin this year leaving many original investors missing out, we maintain a cautious attitude towards whether alts can achieve an effective rebound.

The current US government is still in a shutdown state, and the release of economic data has entered a semi-stagnation period. It is expected that the market will continue to experience severe fluctuations this week, with views potentially changing drastically from day to day. As systematic trading and momentum funds remain deeply entrenched in the market, we must be wary of the potential surge in implied volatility that could trigger an institutional sell-off. Of course, any sudden tweet or statement from either side of the government could instantly reverse the situation. It is recommended to keep risk exposure at a minimum in the coming days. Take care, everyone.