Crypto Market's 1987 Moment Exposes Leverage Risks

The cryptocurrency market's sharp dislocation in October 2025 has sparked comparisons with the 1987 stock market crash. The two events share similar weaknesses in leverage, liquidity, and automated trading systems.

In 1987, the Dow Jones Industrial Average plummeted 22.6% on Black Monday, October 19th. Rising bond yields and currency concerns created a difficult backdrop for markets before automated selling accelerated the decline.

Computerised portfolio insurance, designed to reduce downside risk, backfired by creating a feedback loop. Falling prices triggered further automated selling when liquidity was already dwindling, overwhelming market makers and trading systems.

The 2025 cryptocurrency disruption followed a similar pattern. In October, an initially orderly sell-off intensified as trading systems came under pressure, and liquidity providers reduced their exposure. Binance, accounting for half of global spot cryptocurrency trading volume, faced technical problems affecting its order books and market makers withdrew or widened spreads.

The resulting cascade highlighted the risks created by collateral valuation methods. Binance relied on internal prices from its own order books to calculate margin and collateral, leading to distressed valuations that contributed to additional liquidations.