Finance
The biggest crypto wipeout was led not by bitcoin, but much smaller tokens. Here’s what happened
The crypto industry recently had one of its worst days ever. And while bitcoin and ether holders seem to have put some of the carnage behind them, traders of many lesser-known tokens are still feeling a lot of pain.
More than 1.6 million traders suffered a combined $19.37 billion erasure of leveraged positions over a 24-hour period beginning Friday, Oct. 10. That’s the largest ever liquidation event tracked by crypto-focused data analytics firm CoinGlass. The wipeout marked a dark spot for the digital assets market in an otherwise strong year for cryptocurrencies that saw bitcoin and ether hit record highs. More than a week after the event, its ripples are being felt most in smaller coins.
Bitcoin and ether are trading between roughly 11% and 12% below their respective Oct. 10 highs, with the former token trading above its critical $100,000 resistance level and the latter hovering within striking distance of its key $4,000 price, according to a CNBC analysis of CoinMetrics data. Lesser-known coins such as XRP, solana, dogecoin and BNB are trading between 15% and 24% off their pre-liquidation crisis highs.
Bitcoin and ether’s comparative resilience is largely due to the fact that the two largest cryptos by market capitalization are older and more well established than alternative digital assets, GSR head of content and special projects Frank Chaparro told CNBC.
Bitcoin vs Solana 1-mo chart
“They’re just bigger, more established assets, with ETFs and other structured products behind them,” Chaparro said. “The long-tail tokens are less mature, less liquid, and naturally more prone to volatility.”
Chaparro also noted that bitcoin and ether suffered less losses compared to alternative crypto-assets in this month’s massive liquidation event.
Solana, dogecoin, XRP and BNB are often used for leveraged trading on centralized or decentralized exchanges. Midcap and small-cap digital assets fell between 60% and 80% at the peak of the liquidation event, while bitcoin and ether lost just 11% and 13%, according to crypto-focused market maker Wintermute.
“There’s always been a lot of leverage in crypto,” Fundstrat Global Advisors head of research Tom Lee said last week on CNBC. “The volatility and leverage is what has drawn people into that space, especially when you get outside of Bitcoin and Ethereum, [which] are generally not held on margin.”
Leverage refers to the funds traders borrow to open positions that are larger than the initial capital invested, or margin, that they put up front. A position is liquidated, or forcibly closed, when the collateral a trader used to secure that position is no longer sufficient to cover their losses.
‘Doom loop’
The crypto wipeout came after U.S. President Donald Trump vowed earlier on Oct. 10 to impose “massive” tariffs on China, sending ripples across financial markets. And although fallout from major geopolitical announcements is par for the course in the digital assets market, traders suffered more in this instance due to the unwinding of many leveraged positions.
“You have effectively what’s been described as a doom loop in which the initial price drop triggers some liquidations. And when you’re unwinding those positions into an order book that’s thin…the spot prices of the assets that are being unwound crater,” Chaparro said.
Those price drops prompt crypto exchange’s margin systems to view traders’ collateral differently, leading to more positions being unwound, according to Chaparro. “If you have one bitcoin as collateral when it’s 100k, your collateral position is a lot different than when it’s trading at 70k, and so then more accounts become under collateralized, and the cycle repeats itself.”
“You’re pouring gasoline on fire in a way that’s not the case in other highly leveraged markets,” the executive said.
100x crypto leverage?
In the U.S. and abroad, there are now more ways for traders to gain exposure to crypto. Last year, the U.S. approved the launch of several spot bitcoin ETFs as well as exchange traded funds that track ether, with issuers later rolling out offerings boasting two- or three-times leverage on the tokens’ movements.
Offshore, decentralized exchanges such as Hyperliquid and Binance Labs-linked Aster are becoming popular with traders that want to make bets on crypto with even more leverage. The former offers maximum leverage of 40-times for bitcoin and 25-times for ether, while Aster offers as much as 1,001x leverage, depending on the token.
Trading products with more leverage appeal to investors because they offer higher returns. However, with the potential for higher rewards comes even greater likelihood of losses, according to Zach Pandl, head of research at crypto-focused asset manager Grayscale.
“More leverage means more risk in every financial market,” Pandl told CNBC.
On top of that, crypto’s infrastructure for leveraged trading hasn’t evolved to suit the market’s particularities, Chaparro said.
“We have a 24/7 market that’s built effectively on a nine-to-five exchange infrastructure. And, with crypto markets, you don’t have the same traditional forces that can as easily prevent or remedy stress, like circuit breakers,” Chaparro said.
“The liquidation event is a blip in the story of the functionality and utility of these underlying assets, but it’s not a blip in terms of thinking about the fragile infrastructure of our offshore derivatives markets,” he added.
What’s next?
Crypto researcher Molly White wrote in her blog that the Oct. 10 liquidation event could be a harbinger of things to come for the crypto market and beyond.
“The meltdown reminded us just how quickly crypto markets can unravel when an abrupt shock pierces the euphoria of traders who’ve been watching prices steadily rise, and seem to forget they can do anything else,” crypto researcher Molly White said last Friday in the post. “As crypto grows more interconnected with mainstream finance, future crashes will reach far more widely.”
Juan Leon, senior investment strategist at Bitwise, also noted the possibility that we “see a big correction or bear market that is at least partly fueled by by large liquidations due to these leverage effects.”
But unlike White, Leon thinks traditional finance institutions’ entrance into the cryptocurrency market could help counterbalance the effects of crypto-native players using massive amounts of leverage.
“There’s bigger and bigger quantum of capital in the space controlled by players, as opposed to many small retail traders,” Leon said. “And as more institutional capital comes into this space, it mitigates some of that risk, because large institutions don’t take on 50x leveraged positions … and they tend to hold longer.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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