Crypto Just Had a Flash Crash. Here's What You Need to Know

Markets occasionally dump a bucket of icy water on everyone at once, and on Oct. 10, it was the cryptocurrency sector's turn. In the late afternoon, President Donald Trump threatened to hike tariffs on China, and then a total panic exploded in crypto. For a few terrifying minutes, prices looked like trapdoors into oblivion, wiping hundreds of billions of dollars off the sector's market cap.

Flash crashes like these are obviously extremely uncomfortable for investors, but they're clarifying because they expose weak financial plumbing, miscalibrated risk-taking habits, and shaky narratives. They also give long-term investors a checklist for what to do next. Here's what you need to know, and what you need to do.

Image source: Getty Images.

What just happened

The catalyst for the flash crash had little to do with crypto itself, as the sector is largely unrelated to the flow of trade with China, which the newly threatened tariffs would affect. As the weekend unfolded, Trump and his advisors subsequently softened their tone, which helped markets to stabilize. But the damage was already done.

Prices fell shockingly fast. Bitcoin (CRYPTO: BTC) dropped by more than 12% from the prior week's peak before rebounding somewhat. Ethereum (CRYPTO: ETH) slid by even more at the worst point.

Meme coins and altcoins were utterly shellacked. Dogecoin (CRYPTO: DOGE) briefly cratered by about 50% before stabilizing. Tokens outside the very largest cohort fell even harder. The crypto publication CoinDesk cited a 33% drop across the board for non-BTC, non-ETH assets, with many losing 80% or more, and a small handful losing close to 99.9% of their value in the same very short period.

The scale of this crash was historic. But why did it cascade so badly? Start with leverage.

The market was primed for a massive unwinding by a recent boom in the leveraged trading of perpetual futures in a handful of new decentralized exchanges (DEXes), and highly leveraged activity across the existing set of centralized exchanges (CEXes). Roughly $19 billion of forced liquidations of leveraged positions across DEX and CEX venues have been reported so far, which is the largest on record by a very large margin. The mechanism here was that the initial price shock caused by the tariff announcement caused a huge number of leveraged positions to blow up and get roughly simultaneously liquidated by the exchanges.

Then came problems with liquidity. Reports indicate that as exchanges were in the process of liquidating those leveraged positions, their own collateral used for borrowing was becoming worthless quite rapidly. This in turn caused some market makers to step back from providing their services to altcoins as volatility exploded amid the liquidations, leaving thin order books and allowing absurd air-pockets in pricing.

That's likely why the downward price action became so intense so quickly. Without any liquidity available on tap for exchanges or market makers, and without any buyers at most of the prevailing prices, even a small amount of selling activity can create large price moves -- and there was a lot of selling. There's also some evidence that some of the crypto exchanges' data oracles responsible for being authoritative sources of pricing information seized up or failed in the midst of this process. This heightened fear across both centralized and decentralized venues.

Separately, there is a significant amount of chatter alleging that an insider had advance knowledge of Trump's new tariff policy announcement and took out a very large short position on Bitcoin in advance, pocketing around $200 million in the resulting crash. These allegations are not proven, though they rhyme with previous instances suspiciously perfectly timed trading in advance of tariff-related crypto market dumps.

However, it's important to recognize that Bitcoin was actually the least affected asset during this event, and that its price activity was not really a major contributor to the cascade downward in and of itself.

What long-term investors should do next

The big lessons from the flash crash are simple, and they will age well.

First, do not use leverage to own crypto. Leverage turns both routine and exceptional volatility events into portfolio-destroying liquidations. Blue-chip cryptos like Solana, XRP, Chainlink, and Dogecoin can gap down hard in minutes when liquidity thins. Many traders (or short-term investors) using conservative amounts of leverage -- less than 2X -- were liquidated right alongside the gamblers levered to 100X.

Second, keep the bulk of your exposure restricted to crypto majors like Bitcoin, Ethereum, Solana, XRP, and Chainlink. Bitcoin held up well, and large chains reported a swift rebound as the tariff rhetoric cooled. The fact that they have a real investment thesis that exists independent of market phenomena helps significantly, too.

Finally, stick to the long game. The flash crash revealed what was fragile. What it did not change is the multi-year thesis for the majors, which depends on adoption, infrastructure, and policy clarity. If you build your allocations around that reality, you will be positioned to survive and benefit.

Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Chainlink, Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.