Binance pins crypto’s worst-ever liquidation day on macro risks, not exchange failure

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Binance recently released a report attributing the October 10 flash crash to a combination of macroeconomic factors, heavy leverage, and evaporating liquidity in the market. The exchange clarified that the incident was not a result of any technical issues with its trading systems, despite speculation on social media.

According to Binance, global markets were already facing pressure due to trade-war headlines when the crypto markets experienced a sudden downturn. Bitcoin and ether had been on a rally leading up to the crash, leaving many traders overexposed. The high level of open interest in bitcoin futures and options, exceeding $100 billion, created a volatile environment that led to forced deleveraging as prices started to fall.

During the sell-off, market makers activated risk controls and reduced exposure, causing liquidity to dry up in order books. This lack of liquidity, combined with automated liquidations, resulted in sharp price declines. Data from Kaiko showed that bid-side depth on major exchanges vanished during the peak of the crash, exacerbating the downward spiral.

The impact of the crash was not limited to the crypto market, as U.S. equity markets also experienced significant losses. Binance estimated that around $150 billion in systemic liquidations occurred across global markets on that day.

Blockchain congestion further complicated the situation, with Ethereum gas fees spiking and slowing down transfers. This limited arbitrage opportunities between different platforms and contributed to the fragmentation of liquidity.

Binance did acknowledge two platform-specific incidents during the crash but stated that they did not cause the broader market movement. The first incident involved a slowdown in asset transfers between different Binance accounts, while the second incident resulted in temporary index deviations for certain assets.

The exchange has since implemented changes to address these issues and has compensated affected users. Binance stated that the majority of liquidations occurred before the index deviations, highlighting the initial macroeconomic shock as the primary driver of the crash.

Overall, Binance has compensated users with over $328 million and introduced additional support programs to assist those affected by the flash crash. The exchange remains committed to ensuring the stability and security of its platform for all participants.