3 Lessons Investors Learned Since Crypto's Flash Crash on October 10

Markets have a way of teaching us the same lessons over and over again until we finally learn them, and can then stop paying the price of tuition. On Oct. 10, crypto's flash crash delivered a pop quiz with real consequences. Prices went lower, forced de-leveraging hit decentralized exchanges (DEXes) hard, and plenty of smaller tokens collapsed in minutes before snapping back in the largest crash event in the sector's history.

More importantly for the future, the past couple of weeks offer investors a few critical lessons, so let's take a look.

Image source: Getty Images.

1. The sky really was falling for a moment

Perhaps the most surprising lesson about the flash crash is that it really was the end of the world in crypto, at least during a few harrowing moments and over the course of a handful of very difficult hours.

This was not a routine dip. There was at least $19 billion in forced liquidations of leveraged positions across the market, a record one-day event that was prompted by the U.S. announcement of 100% tariffs on certain China-linked imports that have since been walked back.

Prices in major coins slid hard, while many smaller tokens cratered far more. Bitcoin (CRYPTO: BTC) sank roughly 14% from its early October peak to the overnight low. Dogecoin briefly dropped about 50% intraday on Oct. 10 before recovering a chunk of the move. Ethereum (CRYPTO: ETH) fell more than Bitcoin and then bounced; Solana (CRYPTO: SOL) and Cardano saw much sharper swings typical of large-cap altcoins.

Today, the market is off the mat. The lesson is not that everything is or was fine. It's that the worst periods in markets tend to be short, and also that using leverage is a shortcut to having really bad days during those (inevitable) down periods.

2. The wreckage has not yet washed ashore, and it might not

In the heat of the sell-off and in the immediate aftermath, many investors publicly mused and assumed that we would soon hear a spate of more bad news describing blown-up funds, insolvent crypto exchanges, crypto founders going to jail or being investigated, people losing all of their life savings, and crypto whales exiting for good after getting their portfolios liquidated.

Instead, the picture so far is more boring, which in this context is good.

The crypto sector's core plumbing held up even as there were some peripheral pieces with serious problems; at least one chain got overwhelmed and crashed, and at least one market maker withdrew liquidity, among other issues. But no major operators failed in a way that required their business to shut down immediately. And while there have been many reports of some investors resolving to quit the sector for good, it's a meme in crypto that such promises are almost never kept for long.

Could headlines surface later about newly discovered losses or litigation tied to the flash crash window? Certainly. People bruised from losing their funds are very motivated to try to get some recourse from whoever or whatever they can.

But the absence of immediate structural damage suggests the market is operating much as it did before Oct. 10. For investors, that argues for getting back in the saddle and looking for purchasing opportunities rather than staying fearful on the sidelines. The lesson is that it's the self-correcting resilience of markets that makes it possible to win a profit by buying when it's opportune to do so.

3. Institutionalization is a double-edged sword

One final pattern stood out during the flash crash. Major cryptos held up a lot better than the rest of the market -- but it wasn't just any set of the majors, it was a specific group which has seen adoption by financial institutions.

Minus Bitcoin, Ethereum, and stablecoins, the rest of the market fell about 33% in roughly 25 minutes, which is why so many altcoin charts looked worse than the majors. Ethereum, a long-standing institutional investor favorite alongside Bitcoin, saw swift stabilization relative to many smaller projects.

Why the gap? Larger assets benefit from deeper, more regulated access points and bigger pools of stable capital, including exchange-traded funds (ETFs) that channel retirement capital and advisory money. That helps a lot during times of stress, even if it could also temper upside as crypto markets mature.

For the purpose of positioning, that means the leaders are increasingly the ballast of a crypto allocation, while smaller tokens should remain as smaller satellites only. It also means that investors should learn the lesson that the institutionalization of crypto assets makes the prospect of holding through volatility a lot less painful than it used to be.

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