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.

“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.

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.

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.

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.”