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|4 min ReadCrypto crash wipes $500B as analysts flag leverage risks
Jax Morales
Senior Analyst
Published
Jan 16, 2026
Tariffs spark a sell-off
Friday evening turned brutal for crypto. After U.S. President Donald Trump said he would impose a 100 percent tariff on imports from China, more than half a trillion dollars was erased as the total market fell over 10 percent heading into the weekend. Liquidations hit 20 billion later that night. Many estimate the full figure could be as much as four times that amount. One trader called it the largest liquidation event in dollar terms in crypto history. Markets steadied over the weekend, but the message was loud.
“The arrival of spot crypto ETFs and institutional interest has lulled investors into a false sense of security, but it remains the only market that trades after hours,” said Nic Puckrin, crypto analyst and co-founder of The Coin Bureau. “In this environment, thin liquidity, overleverage, and the involvement of big players make for a toxic cocktail.”
Leverage and ADL under the microscope
The shock exposed how much leverage sat under the surface. “Forecasting the market's movements during a flash crash like this is about as effective as reading tea leaves to predict one's fortune,” said Lucas Kiely, CEO and founder of Future Digital Capital Management. “When volatility spikes the way it did on Friday, the best investment approach is a defensive one. With whales now controlling so much crypto liquidity, the risk of mass liquidation events has increased. This sell-off is a wake-up call for traders that high leverage is a very dangerous game in a market this illiquid and this close to a cycle top.”
Puckrin said the biggest surprise was auto-deleveraging, or ADL, forcing traders out of even profitable positions. He argued the mechanism deserves scrutiny as exchanges review the event. “At the very least, traders must be more aware of this risk before committing to leveraged or long/short trades,” he said.
The Block Research described the cascade. When long positions are forcibly closed, they act like market sell orders and push prices lower. Crypto’s thinner liquidity makes the pressure worse. Each wave of forced selling drops prices again, triggers new liquidation thresholds, and feeds a self-reinforcing loop unique to leveraged crypto trading. It was a huge reminder of how fast this market can move. Everybody knows it.
What comes next
After nearly breaking below 114,400. Ethereum is back near $4,100. Several altcoins have climbed over the past 24 hours, nearly reclaiming Friday’s losses. The Fear & Greed Index fell to its lowest since April, a reading that can indicate a buying opportunity versus higher values that warn of potential correction. Analysts are cautiously positive in the near and medium term.
“The good news is that this has cleaned out the excessive leverage and reset the risk in the market, for now,” Puckrin said. “However, Bitcoin now faces another uphill battle to break past key resistance levels that will allow it to reach a meaningful new all-time high this year.”
Geopolitics and policy will drive the next moves. Kevin Lee, chief business officer of Gate, said new tariffs and tensions may keep pressure on prices, but the Federal Reserve’s scheduled late-October rate cut is a critical offset. “This dovish monetary shift, coupled with sustained institutional inflows and on-chain supply tightening, supports a cautiously optimistic view for crypto's mid to long-term fundamentals,” Lee said. “Despite the turbulence, crypto's role as an inflation hedge and alternative asset class grows more relevant amid elevated global uncertainties.” He expects short-term swings to persist until after the Fed’s Oct. 28–29 meeting.
Jeremy Siegel, professor emeritus of finance at the Wharton School and WisdomTree chief economist, said crypto is still not a strong short-run diversifier for geopolitical and trade shocks. “Gold held up, treasuries actually went up. If you're into a short-run diversifier to risk, bitcoin has a lot of positive features about it,” he said on CNBC. “It will snap back, but for people who are thinking about what's good to diversify for short-term risk, bitcoin still is not there.”
The reset is real. Leverage got punished. Liquidity mattered. The next leg will test who learned the lesson. Tremendous stakes, incredible speed.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.