Core Strategy

Changes to token and equity portfolios will be discussed at the end of this note.

A lot has transpired over the preceding few days. In today’s note, we will walk through the events, discuss the largest liquidation event in crypto’s history, and discuss how we are viewing the setup in the near/medium term.

The Timeline of Events (Friday & Saturday)

• On 10/9, Beijing announced restrictions on rare earth element (REE) exports, and importantly, announced that other countries using Chinese technology to mine and export REE will require Beijing’s permission prior to exporting those materials.
• In response, President Trump took to Truth Social on Friday morning (10/10) and announced that this act would be reciprocated with some sort of response.
• The global market reaction was a painful one, with stocks and crypto trading lower, VIX surging, bonds bid, oil dropping below $60 per barrel, and high-yield credit getting whacked.
• After the US market closed on Friday, President Trump followed up on his threat to escalate tensions with China, stating his intentions to implement a 100% tariff on all Chinese goods on top of existing tariffs, set to go into effect on November 1^st.
• This caused significant added sell pressure after what was already a worrisome day for traders, during what was a more illiquid time of day (after market close).
• This led to a sharp drawdown, which pressured leveraged positions across all centralized and decentralized exchanges.
• In all, the market experienced over $19 billion in liquidations, with altcoins bearing the brunt of the move. Many longtail altcoins moved 80% lower on some exchanges. Open interest collapsed by ~46%.
• Liquidity dried up as it seems that there were market makers that either went belly up or pulled their liquidity from order books for precautionary reasons. Price dislocations were severe, with varying prices being quoted for assets across different exchanges. For instance, SOL on Binance was at one point trading ~$20 below its price on Coinbase.

Further Color on the Altcoin Meltdown

The concerns over an increase in tariffs were undeniably the catalyst. The tape read pretty clear ahead of market close on Friday: the market, as it interpreted it back in Q1/Q2, views onerous tariffs on Chinese goods as growth-negative and, despite a dovish Fed, this likely calls into question how much rapid easing can patch over slowing growth induced by a step function higher in tariffs.

However, the reflexivity in altcoins was more attributable to some crypto-specific market structure nuances.

Perpetual futures exchanges feature a battle between longs and shorts, with funding rates being the incentive mechanism to keep the two parties in balance. At all times, longs must equal shorts, and the aggregate margin on the platform must be enough to pay out all traders if positions were to close on a moment’s notice.

If prices swing wildly to the extent that a bunch of long positions are liquidated, ideally (1) some new capital steps in to bid the liquidation or (2) a commensurate short position is closed and the order books are brought into balance again. If there is a minor shortfall, then there is often an insurance fund that can backstop a limited amount of “bad debt.”

Sometimes, the market swings so wildly that no new capital is willing to step in to bid the liquidation and the implicit bad debt on a platform approaches a level at which the insurance fund would not be sufficient to pay out all of the traders on the other end of the trade (in this circumstance it would be short positions that would be left with the bad debt).

When the insurance fund is unable to cover the aforementioned bad debt, profitable positions are force-liquidated via a process known as Auto-Deleveraging (ADL). This is suboptimal for traders who were short and correct, but the alternative is a bankrupt exchange. Thus, there were countless short positions that were closed out on Friday ahead of their take-profit levels (albeit well in profit) as the market cascaded lower. This was fine for those who were directionally short, but for those who were market neutral, meaning that they were short futures and long spot (or long futures on a different exchange), they were left with their short leg closed and their long leg still open, forcing them to rapidly close their long positions in concert with the ADL.

The combination of sliding prices, auto-deleveraging, and general mass panic likely caused market makers to pull their liquidity from the market when it needed it the most. This led to prices becoming rather disjointed across different exchanges (for instance, SOL on Coinbase was trading ~$20 above SOL on Binance for a non-negligible amount of time). The price dislocations delayed the market’s ability to recover as traders were uncertain what the prevailing market price for assets was.

USDe: A Source of Chaos, But Not the Cause of the Selloff

Another important factor to consider in this whole situation is the role of USDe, the synthetic dollar issued by Ethena Labs. Although it functions like a stablecoin, it differs from traditional asset-backed models. Instead of being collateralized by short-term Treasuries or cash equivalents, USDe is backed by the delta-neutral basis trade.

In practice, USDe is minted when users deposit ETH, which Ethena converts into a long spot position hedged by an equal short perpetual futures position on centralized exchanges such as Binance or Bybit. This structure neutralizes ETH price exposure, while the funding payments received from the short leg of the trade provide the yield distributed to USDe holders. In effect, USDe represents a claim on a tokenized, market-neutral strategy rather than a typical asset reserve.

Recently, USDe was integrated as collateral on Binance. When the liquidation cascade began, intense selling pressure in USDe caused a sharp, venue-specific depeg (it fell from $1.00 to roughly $0.65 on Binance, while remaining much closer to parity elsewhere).

Stablecoins rely on arbitrageurs to step in when the peg breaks, but in this case, it is possible that uncertainty around Ethena’s hedged positions disrupted that process. Perhaps some traders feared that Ethena’s market-neutral short positions might themselves be subject to auto-deleveraging (ADL), leaving the long ETH positions unhedged and creating potential “bad debt” risk for USDe holders. This concern likely delayed the stablecoin’s recovery back to par and exacerbated overall market stress on Friday.

Now it is worth noting that USDe is not subject to the same ADL provisions as other collateral on Binance due to the agreement between Ethena and Binance. This, of course, raises interesting questions over whether this was appropriately divulged to users of Binance, but the major point here is that at no point was USDe at risk of being unbacked.

Should it have been accepted as collateral on the same platform on which Ethena trades? Possibly not, but that is a discussion for a different day.

Ultimately, we saw BTC move ~10% lower, ETH ~20% lower, SOL ~23% lower, and longer tail altcoins anywhere from 30-80% lower. Many of these coins have recovered substantially from their lows but remain well below where they were trading last week. Part of the reason for the recovery will be discussed below.

Trump’s Sunday About-Face

On Sunday, traders woke up to crypto prices rebounding and signs of easing tensions between the U.S. and China.

• Late Saturday, Beijing issued a statement clarifying that “rare earth export controls do not amount to an export ban, and eligible applications will continue to receive licenses.” This was the first sign of de-escalation.
• On Sunday morning, JD Vance suggested on air that Trump’s tariff announcement was a negotiating tactic and that the administration was willing to work with China.
• Trump followed with a Truth Social post: “Don’t worry about China, it will all be fine.”

As we discussed in Friday’s video, Trump’s negotiation playbook tends to follow a pattern:

1. Ask for far more than what you want
2. Threaten to go nuclear if demands are not met
3. Follow through if necessary
4. Extend a peace offering
5. Threatened to walk away again to extract additional concessions
6. Seal the deal once the counterparty meets your terms

This pattern played out earlier this year with other trading partners.

Based on that framework, it appears we have already moved past the “go nuclear” stage and into the “peace offering” phase.

Markets remember this cycle vividly from the 1H’s trade drama, so for credibility, Trump may need to push even harder this time while also working faster to avoid inflicting domestic pain that could trigger a recession.

Takeaways

1. A 100% tariff on China would be near-term bearish for crypto. A sudden, sweeping tariff hike would effectively be a tax on U.S. consumers and a drag on growth that incremental rate cuts or limited QE would struggle to offset.
2. Structurally, tariffs are long-term bullish for crypto. The administration’s goals of reducing deficits and rebalancing trade require stimulating nominal growth amid above-trend inflation, which supports higher asset prices and benefits dollar debasement hedges such as crypto.
3. Trump ultimately wants to make a deal. The quick rhetorical pivot by both Trump and Vance likely reflects constructive signals from Beijing.
4. Markets are conditioned to buy the “TACO trade.” Having already experienced one full cycle of Trump’s negotiation tactics earlier this year, investors are now highly attuned to any hints of compromise.
5. Crypto just flushed a massive amount of leverage. That reduces the risk of further cascades. While it does not guarantee an immediate uptrend, as markets often retest lows after major downside liquidation events, it does establish a psychological floor in the near-to-medium term.
6. Headline risk remains high. Trump could still threaten to walk away at the eleventh hour to gain leverage, keeping volatility elevated.

Positioning and Outlook

We likely have some breathing room between now and any perceived abandonment of trade negotiations (the “Abandon Negotiations” part of the negotiation cycle). There are roughly 3 weeks until November 1^st, the date on which the proposed 100% tariffs would take effect. By all accounts, it also appears likely that President Trump will meet with President Xi later this month. Given that the market has been conditioned for the “TACO trade,” and that we are still expecting a dovish Fed at the next FOMC, the setup over the next two to three weeks looks constructive for crypto.

1. Increasing our relative allocation to ETH and SOL within our Core Strategy token portfolio, reducing relative BTC exposure.
2. Recommending profit-taking on the miners in our Crypto Equities portfolio, as these appear to be approaching exhaustion levels. While I have a request out to Mark for his technical views, one does not need to be a technician to recognize that it makes sense to take gains on positions that have appreciated 2–6x over the past few months. Recall that this is a rebalancing strategy, so if there are no explicit weight changes, that does not mean there is no rebalancing activity occurring.
3. Increasing our relative allocation to ETH ETFs within our Crypto Equities portfolio to align with our view of a potential recovery in ETHBTC.
4. Shifting a portion of our BTC ETF allocation to MSTR. MSTR is currently trading around 1.36x NAV, well below its historical multiple. We see two reasons for this:
   1. First, MSTR has faced increased competition for speculative Digital Asset Treasury (DAT) capital as numerous copycats have launched similar structures.
   2. Second, the implied volatility (IV) profile for BTC has declined sharply as it has been increasingly embraced by traditional finance. Because the Saylor playbook relies on selling volatility to fund BTC purchases, a collapse in IV constrains MSTR’s ability to accumulate BTC. Slower BTC-per-share growth can, in turn, create a negative feedback loop for IV.

That said, we see reasons for optimism heading into Q4. Many of the copycat DATs that attracted speculative capital earlier this year are now languishing toward obscurity, and we expect that capital to refocus on the original BTC DAT (MSTR). Additionally, MSTR will have another opportunity for SPX inclusion in December. Index inclusions are typically front-run, and if speculation begins to build around potential inclusion, this could lead to a renewed spike in IV, effectively restarting the MSTR flywheel.