Crypto’s 1987 moment puts market structure in focus

RICA

The cryptocurrency market’s sharp dislocation in October 2025 has revived comparisons with one of the most important episodes in modern financial history: the 1987 stock market crash. Although the assets, technologies and market participants are very different, the two events exposed similar weaknesses in leverage, liquidity and automated trading systems.

On Black Monday, 19 October 1987, the Dow Jones Industrial Average fell 22.6% in a single session. The precise trigger remains uncertain, but the severity of the decline was amplified by the structure of the market. Rising bond yields, concerns over currencies and weaker equity markets had already created a difficult backdrop before automated selling accelerated the move.

Computerised portfolio insurance was intended to reduce downside risk by selling index futures as markets fell. Instead, the strategy created a feedback loop. Falling prices generated further automated selling at a time when liquidity was disappearing. Market makers became overwhelmed, trading systems struggled with unusually heavy volumes and mismatches between the settlement of equities and futures created additional funding pressure.

The experience eventually led to changes including circuit breakers and improved coordination between futures and cash markets. Those reforms did not remove market risk, but they introduced mechanisms intended to prevent technical and structural problems from turning ordinary selling into a wider financial disruption.

Nearly four decades later, cryptocurrency markets encountered a comparable test. In October 2025, an initially orderly sell-off intensified as trading systems came under pressure and liquidity providers reduced their exposure. Around $19 billion of leveraged positions were liquidated within 24 hours.

Binance, which accounted for around half of global spot cryptocurrency trading volume, was at the centre of the disruption. As activity surged, technical problems affected its order books and market makers widened spreads or withdrew. With fewer buyers available, prices moved sharply lower, producing margin calls and automated liquidations.

The disruption also highlighted risks created by the way collateral was valued. Binance relied primarily on prices from its own internal order books when calculating margin and collateral. When those prices diverged from other trading venues, distressed internal valuations could therefore lead to additional liquidations.

USDe, a stablecoin designed to maintain a value of $1, briefly traded as low as $0.65 on Binance while remaining close to $1 elsewhere. Its issuance and redemption mechanism continued to operate normally, indicating that the dislocation reflected market liquidity rather than an underlying failure of the asset’s redemption process.

The resulting cascade demonstrated how leverage can magnify market structure problems. Crypto futures can offer leverage of up to 100 times, while exchanges use automated liquidation processes, insurance funds and auto-deleveraging systems to manage losses. During the October event, all three mechanisms were activated on a number of exchanges.

Auto-deleveraging created an additional complication for some market-neutral strategies. Profitable short positions could be closed automatically while corresponding long positions remained open. Traders then had to restore their hedges, potentially adding further selling pressure at a point when liquidity was already limited.

Circuit breakers could provide time for liquidity to recover, while broader price references could reduce dependence on a single exchange during periods of technical stress. Incentives or obligations for market makers could also support market depth when conditions become difficult, while leverage limits could reduce the scale of forced liquidations.

Implementing such measures would not be straightforward. Cryptocurrency markets operate across fragmented global exchanges, and greater regulation can conflict with the decentralised principles that attracted many participants to the asset class. Nevertheless, the October disruption showed that automated safeguards can themselves contribute to instability when market liquidity disappears.

Traditional finance is increasingly examining innovations developed in digital asset markets, including stablecoins, tokenisation, around-the-clock trading, perpetual futures and programmable assets.

Stablecoins can support faster cross-border payments and settlement, while tokenisation could improve the transferability, accessibility and price discovery of assets such as bonds, property, money market funds and private assets. Smart contracts also provide opportunities to automate processes including compliance, coupon payments, dividends, clearing and settlement.

The central lesson from both 1987 and 2025 is that financial innovation requires resilient market infrastructure. Leverage, derivatives and automated trading can improve efficiency, but they can also magnify shocks when liquidity disappears. Combining stronger safeguards with technologies that reduce settlement delays and operational friction could leave both traditional and digital markets better positioned to manage future periods of stress.

Ruffer Investment Company Limited (LON:RICA) is a British investment company dedicated to investments in internationally listed or quoted equities or equity related securities

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