Author: Blockchain Knight
According to CoinGlass data, forced liquidations in the cryptocurrency derivatives market reached $150 billion in 2025. While this appears to signal a year-long crisis on the surface, it is actually a structural norm in a market where derivatives dominate marginal pricing.
Forced liquidations due to insufficient margin function more like a periodic tax on leverage.
Against the backdrop of a total annual derivatives trading volume of $85.7 trillion (averaging $264.5 billion daily), liquidations are merely a byproduct of the market, stemming from the price discovery mechanisms dominated by perpetual swaps and basis trading.
As derivatives trading has increased, open interest has recovered from the deleveraging lows of 2022-2023. On October 7th, the nominal open interest for Bitcoin reached $235.9 billion (a time when Bitcoin's price had touched $126,000).
However, the combination of record open interest, crowded long positions, and high leverage in small-to-mid-cap altcoins,叠加 with the global risk-off sentiment triggered by Trump's tariff policy that day, sparked a market reversal.
Over October 10th-11th, forced liquidations exceeded $19 billion, with 85%-90% being long positions. Open interest plummeted by $70 billion within days and fell to $145.1 billion by year-end (still higher than at the start of the year).
The core contradiction in this volatility lies in the risk amplification mechanism. Routine liquidations rely on insurance funds to absorb losses, whereas in extreme market conditions, the Automatic Deleveraging (ADL) emergency mechanism inversely amplifies risks.
During liquidity droughts, frequent ADL triggers force the reduction of profitable short positions and market maker holdings, causing market-neutral strategies to fail. Long-tail markets were hit hardest, with Bitcoin and Ethereum falling 10%-15%, while perpetual contracts for most small-cap assets plummeted 50%-80%, creating a vicious cycle of "liquidation - price drop - further liquidation".
Exchange concentration exacerbated the contagion risk. The top four platforms, including Binance, account for 62% of global derivatives trading volume. During extreme volatility, simultaneous risk reduction and similar liquidation logic across these exchanges triggered concentrated selling.
Additionally, pressure on infrastructure like cross-chain bridges and fiat channels hindered cross-exchange fund flows, rendering cross-exchange arbitrage strategies ineffective and further widening price disparities.
Of course, the $150 billion in annual liquidations is not a symbol of chaos, but rather a record of risk aversion in the derivatives market.
The 2025 crisis did not, so far, trigger a chain reaction of defaults, but it exposed structural limitations such as reliance on a few exchanges, high leverage, and certain mechanisms—with the cost being the centralization of losses.
In the new year, we need more robust mechanisms and rational trading; otherwise, another '1011' event will recur.
