During the weekend in early August, the crypto world felt a chill overnight. In just 24 hours, over $600 million in long positions evaporated in a series of cascading liquidations. The market's panic sentiment spread rapidly like ignited wild grass. Bitcoin's price fell from a high of nearly $119,000 to briefly breach the $114,000 mark. Social media was filled with wails, confusion, and accusations. People were eager to know where this sudden storm came from.
This is not an isolated 'crypto-native' event, but a chain reaction ignited by external macroeconomic shocks that exposed internal structural vulnerabilities in the market. The sparks of geopolitical tensions and the paradox of economic data jointly ignited the fuse, triggering a market already saturated with dangerous high leverage. The entire path of the liquidation waterfall seems to be precisely guided by the gravitational pull of a long-standing gap in futures at the Chicago Mercantile Exchange (CME). This is a 'perfect storm' of macroeconomic, microeconomic, and technical factors perfectly resonating.
External shocks: The trigger for global risk aversion.
The roots of this crash are deeply embedded in the soil of the traditional financial world. Two macroeconomic events occurring almost simultaneously served as catalysts for a comprehensive market sell-off, clearly demonstrating the increasingly tight linkage between crypto assets and the global economic pulse.
First, there are the clouds of geopolitical tensions. On August 1, the Trump administration suddenly announced a wide-ranging new tariff on imports from 92 countries and regions, with rates ranging from 10% to over 40%. This move immediately triggered a classic 'risk-off' mode globally. Capital fled from risk assets into gold, perceived as a 'safe haven', pushing gold prices to briefly soar above $3,350 per ounce. The Chicago Board Options Exchange Volatility Index (VIX), known as Wall Street's 'fear index', also surged significantly.
In this environment, institutional capital did not view Bitcoin as 'digital gold', but categorized it as a high-beta risk asset similar to tech stocks. As a result, tariff news directly pressured cryptocurrency prices, becoming a key external factor for Bitcoin's drop below $115,200.
Compounding the problem, the U.S. Bureau of Labor Statistics released the July Non-Farm Payroll report (NFP) on August 2, showing only 73,000 jobs added in that month, far below the market's general expectation of 106,000. More shockingly, as noted by New York Fed President John Williams, the 'real news' in the report was the 'abnormally large' downward revision of May and June data, indicating that the actual state of the U.S. labor market is much weaker than previously thought.
Source: (MarsBit)
This weak report triggered a contradictory market reaction. On one hand, it intensified fears of economic recession, directly fueling sell-offs under risk-averse sentiment. On the other hand, it dramatically changed market expectations for the Federal Reserve's monetary policy. According to CME's 'FedWatch Tool', the market's forecast of the Fed cutting rates by 25 basis points in September soared from less than 40% a day earlier to 89.8%.
This constitutes the most subtle core driving mechanism of this event: the market is forced to price between two completely opposite narratives.
The first narrative is 'fear': Tariffs and weak employment data point to the risk of economic recession, and fund managers' instinctive reaction is to lower risk exposure by selling high-volatility assets like Bitcoin.
The second narrative is 'hope': The same weak data is interpreted by another group of algorithms and analysts as forcing the Federal Reserve to act by lowering interest rates to stimulate the economy. Historically, the liquidity increase brought by lower interest rates has been the 'rocket fuel' for risk assets.
The market thus finds itself in a dilemma, and this profound uncertainty has bred extreme volatility, laying the groundwork for the upcoming large-scale liquidations.
Internal detonation: A market prepared for a crash.
If the macroeconomic shock is a lit match, then the internal structure of the crypto market is a barrel filled with gunpowder. On the eve of the crash, extreme optimism and rampant leverage had created the perfect conditions for a catastrophic implosion.
In the days leading up to the crash, the derivative financial products market had already sounded a clear red alert. The total open interest (OI) in Bitcoin futures surged to its highest level since the end of 2024, exceeding 300,000 Bitcoins, with a nominal value of up to $42 billion. This indicates that massive capital was locked in futures contracts, and the market leverage level was extremely high.
Even more critically, the funding rates on mainstream exchanges remained persistently positive, a clear signal: the market was dominated by leveraged long positions. Bullish traders were so confident that they were willing to continue paying bearish shorts to maintain their long positions.
Source: (MarsBit)
When the macroeconomic-driven sell-off began, it triggered a domino effect. Data from Coinglass shows that a total of $396 million in leveraged positions were liquidated, of which $338 million (85%) were long positions. Other sources indicate that the total liquidation amount reached as high as $635 million to $726 million, with longs accounting for nearly 90%. This liquidation waterfall was not accidental, but rather a brutal yet necessary self-correction mechanism of the market. The logic of its occurrence is as follows:
First, the market accumulated a huge 'leverage imbalance'. Second, the external shock arrived, leading to an initial price decline.
Next, this decline triggered the forced liquidation of the first batch of highly leveraged long positions. These forced sell orders injected more supply into the market, further driving down prices and triggering the liquidation of the next tier of slightly less leveraged longs.
Ultimately, a vicious cycle formed: each wave of liquidation led to further price declines, triggering the next wave of larger-scale liquidations.
Technical destination: The gravitational pull of the CME gap.
The initial judgment of users — that the market's decline was to 'fill the gap' — touched on a key technical aspect of this event. The CME gap played a black hole-like role in this chaotic market, providing a clear destination for the price's free fall.
Source: (MarsBit)
As a regulated traditional financial exchange, CME's Bitcoin futures products close over the weekend. However, the cryptocurrency spot market trades continuously 24/7. This leads to a gap on CME's charts, where there is often a blank area with no trading records between Friday's closing price and the following Monday's opening price, known as a 'gap'. A widely circulated theory among traders is that market prices tend to 'fill' these gaps.
In the chaotic market, the CME gap acted as a 'Schelling Point' — a natural focal point that all parties could find without communication. For sellers and liquidity-hunting algorithms, it was a predictable and perfect target for attack. When macroeconomic news provided a catalyst for sell-offs, the sell behavior of these algorithms was not random. They exert pressure along the paths of least resistance and greatest impact. Targeting a known gap can ensure they precisely trigger stop-loss and liquidation orders clustered around that level.
As prices were algorithmically pushed towards the gap, human traders who were also focused on the gap joined the sell-off out of concern that the gap would be fully filled, further enhancing the downward momentum. Therefore, the gap was not the cause of the crash, but it became the destination of the crash.
Capital game: Whales' sell-off and ETF's absorption.
Beneath the surface price plunge in the market, a silent war over capital flows is unfolding. On-chain data reveals starkly different behavioral patterns among various market participants.
Data from on-chain analysis platforms like CryptoQuant and Lookonchain shows that in the hours and even days leading up to the crash, 'whales' holding large amounts of Bitcoin were actively transferring tokens to exchanges. A notable example is the well-known trading firm Galaxy Digital, which deposited over 10,000 Bitcoins (worth about $1.18 billion at the time) into exchanges like Binance, Bybit, and OKX in less than 8 hours. This behavior is a typical signal of 'smart money' distribution.
Source: (MarsBit)
In stark contrast to the whales' distribution behavior, the newly established spot Bitcoin ETFs continued their systematic buying pace. Analysts noted that 'institutional demand continues to absorb supply', and these ETFs played a crucial supporting role during the market downturn, preventing further price collapse. This represented a powerful, non-discretionary buying force in the market.
Unlike whales who trade based on tactical needs, ETF purchasing behavior depends on customer capital inflows, creating a steady, continuous demand flow that provides solid support for prices. This battle between short-term tactical sellers (whales) and long-term systematic buyers (ETFs) clearly reveals the market's inherent resilience and answers a key question: 'Why didn't prices drop lower?'
The long road ahead: Navigating at the crossroads.
After this storm, the market did not welcome calm but entered a crossroads filled with confusion and divergence. Analysts' comments also showed significant disagreement. Some, like Nathan Peterson of Charles Schwab, suggested investors 'sell on rallies'. Others believed the market was in a 'healthy buying zone'. Ran Neuner, founder of Crypto Banter, even predicted that Bitcoin could still reach $250,000 by the end of the year, while Michael Saylor, founder of MicroStrategy, called this drop 'God's gift'.
Currently, the market is weighing short-term fears of economic recession against medium to long-term bullish expectations for Federal Reserve interest rate cuts and a new round of liquidity injections. This crash fundamentally reset market dynamics, forcing every participant to re-examine their investment logic. The future direction will depend on which group of capital — short-term traders scared off by macroeconomic fears, or institutional investors who persist in long-term accumulation — can exert a greater influence. The massive liquidation event has washed out the most reckless leverage in the market, making the market structure 'cleaner' but also more cautious. This post-crash era is a high-risk test of the maturity and institutionalization of the crypto market.
Conclusion: Lessons from the storm.
The 'August Storm' of 2025 is a multi-act drama. It began with shocks from the macroeconomic and geopolitical fronts, amplified indefinitely by a fragile and over-leveraged derivative financial products market, ultimately finding its technical refuge at a CME gap.
This event provides us with profound lessons about the modern crypto market, revealing its inherent duality. On one hand, its increasingly close integration with the global financial system provides long-term growth momentum and potential price floors. On the other hand, the same integration also makes it extremely vulnerable to shocks from traditional markets and geopolitical events.
'August Storm' is the ultimate manifestation of this tension — a direct collision between the old world's macroeconomic fears and the new world's accumulation of digital assets. The future of cryptocurrency will be defined by how it navigates between these two powerful and often opposing forces.
This article is reprinted with permission from: (MarsBit)
Original title: (Tariffs, Panic, and Gaps: A Textbook-Style De-leveraging in the Crypto Market)
Original author: Luke, Mars Finance
'Textbook-style liquidation! Tariffs, panic, and gaps, how they brought about a de-leveraging storm in early August' was first published in 'Crypto City'.
