How crypto-native leverage caused Bitcoin’s decline while ETFs barely faltered

JPMorgan attributes the recent declines in Bitcoin (BTC) and Ethereum (ETH) to crypto-native leverage rather than institutional exits, noting that while spot ETFs and CME futures have absorbed minimal forced selling, the perpetual futures market is facing rapid deleveraging in both assets.

Bitcoin fell 13.1% from $122,316 on October 3 to $106,329 by October 17, and open interest fell from about $70 billion to $58 billion on October 10. This $12 billion decline suggests a forced liquidation rather than an orderly unwinding of positions.

According to data from Farside Investors, the Bitcoin Spot ETF recorded net outflows of $70.4 million concentrated on October 14, 15, and 16, which were minimal compared to the magnitude of price movements and leveraged flashes in the derivatives market.

Ethereum has seen even more severe deleveraging relative to its market size. Open interest fell from about $28 billion to $19 billion to $20 billion on October 10, a decrease of $9 billion to $10 billion.

The Ethereum Spot ETF recorded net outflows of $668.9 million on October 9, 10, 13, and 16, nearly 9.5 times the Bitcoin ETF outflows, with concentrated redemptions occurring on October 10 and October 13.

Despite the strong institutional reaction in the Ethereum ETF, JPMorgan concluded that perpetual futures deleveraging drove price movements in both assets, and that ETF flows “exhibited little forced selling” compared to derivatives cascades.

The data supports Banks’ theory. Ethereum’s open interest fell by about 35%, and Bitcoin’s by about 17%. However, both assets fell in unison on October 10 as deleveraging occurred across crypto-native venues.

How persistent flash works

Perpetual futures are traded with leverage, which exaggerates movements. When prices collapse, margin rates drop and exchanges liquidate undermargined positions with market orders, hitting thin books and triggering a reflexive cascade.

Cross margining amplifies this movement as the collateral marked in the market shrinks as the asset declines, forcing supposedly safe accounts to break through maintenance thresholds and add more forced flows.

Find out your funding rate the quickest. During a downflush, the perpetual trade typically switches to a continuous negative interest rate with the perpetual trade discounted to the spot index.

The turn comes when the funds decrease towards zero while the permanent premium or discount ends. Ideally, prices would stabilize as spot trading volumes increase, not just permanent activity.

Open interest is the second pillar. A sharp decrease in total open interest due to a sale means leverage has left the system without switching to new short sales.

Bitcoin’s 17% drop and Ethereum’s 35% open interest drop both indicate true deleveraging.

Constructive restructuring takes time and is spot-driven. While prices have recovered or remained at baseline levels, open interest has increased modestly, funding has remained roughly flat, and perpetual basis remains tight.

A persistent bottom after a persistent flush looks like negative funding returning to zero, persistent discounting ending, open interest gradually resetting and rebuilding, and the futures curve returning to mild contango.