Article 4

Risk Management & October 2025 Crypto Liquidation Surge

Risk management is the discipline of identifying, assessing, mitigating, and monitoring exposures that threaten capital. In crypto, the stakes are higher: volatility is extreme, leverage is common, and feedback loops can turn a headline into a cascade.

Traditional finance leans on hedging, limits, stress testing, diversification, capital buffers, and scenario analysis. Crypto requires all of that—plus stricter psychology—because structure, not emotion, keeps portfolios alive.

Mindset: “Mistakes are experience—if you become aware of them.”

1) Why Crypto Is a High-Risk Playground

  • Leverage & margin: borrowed exposure amplifies moves—and liquidations.
  • Thin depth: low liquidity means slippage and gap risk.
  • Correlation & contagion: majors fall, alts follow.
  • Opacity & counterparty risk: uneven controls across venues and protocols.
  • Macro/geo shocks: policy surprises can trigger systemic feedback loops.
Translation to practice: size small, diversify, and plan exits before entries.

2) What Happened: The October 2025 Mega-Liquidations

In October 2025, the market suffered one of its largest liquidation waves on record: over $19B in leveraged positions unwound within a single session as a geopolitical tariff shock hit sentiment. Panic selling drove prices lower, margin calls fired, and automated liquidations cascaded across exchanges and DeFi. An estimated ~1.6M accounts were affected; many thinly traded altcoins fell 50%+ at the nadir.

Core truth: in a leveraged, fast market, a modest catalyst can ignite a violent chain of forced selling.

3) Emotions vs System

Emotions
  • Panic in drawdowns
  • Thrill on pumps
  • Envy of others’ PnL
  • Fear of Missing Out (FOMO)
System
  • Explicit risk/position limits
  • Pre-written take-profit tiers
  • Focus on your process and data
  • Clear entry/exit and invalidation levels
Psychology + Strategy: discipline transforms volatility from enemy to edge.

4) Five Rules of a Crypto-Practitioner

  1. Think in months and years, not hours.
  2. Ignore noise (news, pumps, fear).
  3. Calculate—don’t guess. Backtest, size, model.
  4. Respect the strategy and the risk limits.
  5. Wait is a position: pause, reflect, and skip low-quality trades.

5) Practical Toolkit

  • Position sizing: cap risk at ~0.5–2% per idea; avoid portfolio-sinking bets.
  • Stops & invalidation: set where the thesis is wrong—not where it feels “comfortable.”
  • Profit taking: scale out at planned levels; don’t chase extensions.
  • Diversification: blend majors with stables/cash; avoid single-narrative exposure.
  • Stress testing: “BTC −30% in an hour”—does the portfolio survive?
  • Counterparty hygiene: prefer transparent venues (audits, proofs of reserves).
  • Structural guardrails: explore circuit-breaker logic where available to slow liquidation spirals.
Rule of thumb: when volatility expands, raise cash. Dry powder = optionality.

6) Review Cadence

Log weekly:
  • Best/worst trade and the real cause
  • Plan vs execution (adherence score)
  • One change for next week
↓ Max DDcontrolled drawdown
↑ R/Tradequality of wins
↑ Disciplineplan adherence
Cycle: Plan → Execute → Review → Adjust one lever → Repeat.