If you've been following along here at the Chaikin PowerFeed, yesterday I discussed a historic wipeout in crypto futures... Plenty of investors don't get involved with crypto. But as I said, what happened last October is a warning – whether you own crypto or not.
A Change in the Crypto 'System' Could Mean Big Risk for Investors
Plenty of investors don't get involved with crypto. But as I said, what happened last October is a warning – whether you own crypto or not.
And this risk comes down to a shift in how folks borrow these assets...
Up until roughly a couple years ago, most borrowing happened via "centralized finance" ("CeFi") platforms.
CeFi works like a traditional bank. You deposit your crypto with a company. And that company lends it out to borrowers.
The CeFi company manages everything – including custody, interest rates, risk assessment, and loan approvals.
But "decentralized finance" ("DeFi") operates differently...
DeFi platforms use so-called "smart contracts" on blockchains like Ethereum to automatically match lenders with borrowers. That means there isn't a company sitting in the middle. The code handles everything.
By early October, DeFi platforms were carrying about $41 billion in loans. That was up 55% from just three months earlier.
Here's how the market looked going into the October 10 crash...
And if you want to trade crypto with borrowed money, DeFi has some clear advantages...
Borrowers maintain control of their assets. They don't need to provide personal identification. And they can access loans 24/7 from anywhere without waiting for approval.
The process is also transparent. All the rules are visible in the "smart contract" code. And there's no risk of a centralized company freezing your account or denying credit.
But during an event like what happened on October 10, DeFi code executes exactly as programmed.
If prices drop and collateral ratios are breached, liquidations happen automatically – even if they result in a cascade of selling that's worse than the original problem.
With CeFi, the platform could temporarily halt trading or manually intervene – much like circuit breakers on major stock exchanges. But DeFi platforms don't offer that protection.
The lack of controls becomes especially dangerous when you combine it with extreme leverage. Offshore DeFi platforms offer some of the highest leverage in the system.
Hyperliquid, one of the largest DeFi platforms, offers leverage of up to 40 times for Bitcoin and 25 times for Ether – the native cryptocurrency of the Ethereum blockchain.
Another offshore platform called Aster offers leverage of up to 1,001 times for certain coins.
This kind of extreme leverage turned dangerous when the market collapsed...
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Big Failures on Crypto Platforms
During the chaos on October 10, some exchanges simply stopped working. On Binance, the platform froze accounts, failed to execute orders, and didn't trigger stop losses.
Users reported similar problems on other platforms. On Robinhood, the app simply froze.
The platform failures made a bad situation worse. When exchanges can't liquidate positions fast enough, they tap into their insurance funds.
Those are emergency reserves meant to cover losses when traders' accounts go negative.
On October 10, Binance's futures insurance fund had to deploy $188 million in a single day to cover bad debts.
But that was just the beginning...
On October 14, Binance launched the "Together Initiative." In a post on social platform X, Binance called it "a $400 [million] recovery and confidence-rebuilding plan to support users and institutions" affected by the crash.
The package included $300 million in vouchers for traders who suffered liquidation losses. It also included $100 million in low-interest loans for "severely impacted" institutions.
This came on top of roughly $283 million that Binance had already paid out days earlier to users affected by platform pricing issues during the crash.
But the most concerning development within all of this was the implementation of auto-deleveraging ("ADL") across several exchanges...
The Biggest Warning From the October Crypto Crash
ADL is the "last line of defense" to prevent an exchange from going bankrupt. When it kicks in, it means that the system is running out of money.
It works like this...
Let's say that during a crash, prices collapse so fast that losing positions can't be closed quickly enough.
Maybe there aren't enough buyers. Or maybe prices slip too much during the sale.
Either way, some traders' accounts go negative. So they owe more than they deposited.
Someone has to cover that hole to pay the winners. And that's where ADL comes in...
The exchange forces profitable traders to close their winning positions early, whether they want to or not. Your position gets closed at a price you didn't choose, locking in profits you might have wanted to hold longer.
The system cannibalizes its winners to survive.
It's famed investor Michael Burry's nightmare all over again. As I said yesterday, making the right bet doesn't matter if the system can't stay solvent long enough to honor it.
Within weeks, the events of October 10 faded from headlines. But since then, not much has changed.
Platforms still offer leverage of 40 times, 100 times, or even 1,000 times on volatile assets. DeFi protocols still execute liquidations automatically with no circuit breakers. And offshore platforms operate beyond the reach of regulators who might impose position limits or capital requirements.
Folks, whether you're a "bull" or a "bear" on crypto doesn't matter with all this. The October 10 events reveal two real risks...
The first is what I call the "over-levered neighborhood" effect. If you do own crypto, it's important.
Say you own a house with reasonable leverage – a mortgage of 60% to 80% of what you paid. Then people around you borrow heavily and buy houses at inflated prices.
If this were a game, you would be winning. The game keeps going as long as everyone can borrow more money.
But when things turn south, everyone needs to get out fast. Even with reasonable leverage, you get crushed because your over-levered neighbors are all selling at once.
This is exactly what Burry was betting on in The Big Short.
The second risk applies whether you own crypto or not...
Traditional finance and crypto are becoming deeply intertwined.
Major banks custody crypto. Wall Street firms trade crypto derivatives. Public companies hold Bitcoin on their balance sheets. And crypto exchange-traded funds ("ETFs") give retail investors easy access to digital assets through their brokerage accounts.
Some folks say the system is fine for now, but these interconnections can and will change the math on how shocks move through the system.
And crypto industry watchers think that leverage within the system will climb to more than $90 billion this year. They also expect continued growth in DeFi lending.
It's all worth keeping an eye on... even if you never touch crypto yourself.
Good investing,
Joe Austin
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
-0.8%
6
20
4
S&P 500
-0.2%
119
260
121
Nasdaq
-0.15%
21
51
28
Small Caps
-0.06%
619
981
289
Bonds
+0.17%
Energy
+1.42%
5
15
2
— According to the Chaikin Power Bar, Small Cap stocks are more Bullish than Large Cap stocks. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Consumer Staples
+4.7%
Energy
+2.98%
Materials
+2.59%
Consumer Discretionary
+2.59%
Industrials
+1.23%
Real Estate
+0.57%
Information Technology
-0.12%
Utilities
-0.14%
Communication
-0.38%
Health Care
-0.85%
Financial
-3.85%
* * * *
Industry Focus
Oil & Gas Equipment Services
18
11
1
Over the past 6 months, the Oil & Gas Equipment Services subsector (XES) has outperformed the S&P 500 by +24.01%. Its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #4 of 21 subsectors.
Top Stocks
HLX
Helix Energy Solutio
INVX
Innovex Internationa
RES
RPC, Inc.
* * * *
Top Movers
Gainers
MRNA
+17.02%
INTC
+7.33%
AMD
+6.39%
RVTY
+6.02%
SOLS
+5.77%
Losers
CRM
-7.07%
SOLV
-6.61%
ADBE
-5.41%
ALL
-5.28%
PGR
-5.28%
* * * *
Earnings Report
Earnings Surprises
BK The Bank of New York Mellon Corporation
Q4
$2.08
Beat by $0.10
JPM JPMorgan Chase & Co.
Q4
$4.63
Missed by $-0.23
DAL Delta Air Lines, Inc.
Q4
$1.55
Met estimate
* * * *
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