Tariffs, Panic, and Gaps: A Textbook Example of Deleveraging in the Crypto Market

Written by: Luke, Mars Finance

This weekend at the beginning of August, the crypto world felt a chill overnight. In just 24 hours, over $600 million in long positions evaporated in a series of liquidations. The market’s panic sentiment spread rapidly, like dry grass ignited by a spark. The price of Bitcoin dropped from a high of nearly 119,000, briefly falling below the 114,000 mark. Social media was filled with wails, confusion, and blame. People were eager to understand where this sudden storm had come from?

This is not an isolated “crypto-native” event, but rather a chain reaction ignited by external macroeconomic shocks that expose internal structural vulnerabilities in the market. The sparks of geopolitical tensions and paradoxical economic data have combined to light the fuse, triggering a market already saturated with dangerous high leverage. The entire path of the clearing waterfall seems to be precisely guided by the gravitational pull of a futures gap at the Chicago Mercantile Exchange (CME) that has long existed. This is a “perfect storm” where macro, micro, and technical factors resonate perfectly.

External Shock: The Trigger of Global Risk Aversion

The root of this crash is deeply embedded in the soil of the traditional financial world. Two macro events that occurred almost simultaneously served as catalysts for a comprehensive market sell-off, clearly demonstrating the increasingly close connection between crypto assets and the pulse of the global economy.

First, there are clouds of geopolitical tension. On August 1, the Trump administration suddenly announced broad new tariffs 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 and surged into gold, which is seen as a “safe haven,” pushing gold prices to soar past $3,350 per ounce at one point. 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 classified it as a high beta risk asset similar to tech stocks. Therefore, the tariff news directly exerted pressure on cryptocurrency prices, becoming a key external factor for Bitcoin to drop below $115,200.

Adding insult to injury, the non-farm payroll report (NFP) for July released by the U.S. Bureau of Labor Statistics on August 2 showed that only 73,000 jobs were added that month, far below the market consensus expectation of 106,000. More strikingly, as noted by New York Fed President John Williams, the “real news” in the report lies in the “exceptionally large” downward revisions of the data for May and June, indicating that the actual state of the U.S. labor market is much weaker than previously thought.

This weak report triggered a contradictory reaction in the market. On one hand, it intensified concerns about an economic recession, directly fueling selling 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 for the Federal Reserve to cut interest rates by 25 basis points in September surged from just under 40% a day earlier to 89.8%.

This constitutes the most subtle core driving mechanism in this event: the market is forced to price between two completely opposing narratives. The first is the ‘fear narrative’: tariffs and weak employment data together point to the risk of economic recession, and the instinctive reaction of fund managers is to reduce risk exposure by selling Bitcoin and other high-volatility assets. The second is the ‘hope narrative’: the same weak data is interpreted by another group of algorithms and analysts as something that will compel the Federal Reserve to act by lowering interest rates to stimulate the economy. The liquidity increase brought about by lower interest rates has historically been the ‘rocket fuel’ for risk assets. The market is thus caught 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 Collapse

If macro shocks are the lit match, then the internal structure of the crypto market is a barrel full of gunpowder. In the run-up to 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 derivatives market had already issued a clear red alert. The total open interest (OI) of Bitcoin futures soared to its highest level since the end of 2024, exceeding 300,000 Bitcoins, with a nominal value of up to 42 billion dollars. This indicates that massive capital is locked in futures contracts, and the market leverage level is extremely high. More critically, the funding rates on mainstream exchanges have consistently remained positive, which is an unmistakable signal: the market is dominated by leveraged long positions. Bullish traders are extremely confident, to the extent that they are willing to continuously pay fees to bearish shorts to maintain their long positions.

When macro-driven sell-offs begin, they trigger 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 between $635 million to $726 million, with long positions accounting for nearly 90%. This liquidation cascade is not accidental, but rather a brutal yet necessary self-correcting mechanism of the market. The logic behind its occurrence is as follows: First, the market accumulated a huge “leverage imbalance”. Second, an external shock arrives, leading to an initial price decline. This decline triggers the forced liquidation of the first batch of highly leveraged long positions. These forced sell orders inject more supply into the market, further depressing prices, thereby triggering the liquidation of the next tier of slightly lower leveraged longs. Ultimately, a vicious cycle is formed: each wave of liquidation leads to further price declines, triggering the next wave of larger-scale liquidations.

Technological Destination: The Attraction of the CME Gap

The user’s initial judgment—that the market decline is to “fill the gap”—touched upon a key technical aspect of this event. The futures gap at the Chicago Mercantile Exchange (CME) has played a role akin to a black hole in this chaotic market, providing a clear destination for the free fall of prices.

As a regulated traditional financial exchange, CME’s Bitcoin futures products close for trading on weekends. However, the cryptocurrency spot market operates 24/7 without interruption. This leads to a blank area on CME’s charts between the closing price on Friday and the opening price on Monday, often referred to as a “gap.” A well-known theory among traders is that market prices tend to “fill” these gaps.

In a chaotic market, the CME gap acts as a “Schelling Point” - a natural focal point that all parties can find by tacit agreement without communication. For sellers and liquidity-hunting algorithms, it is a predictable and perfect target for attack. When macro news provides a catalyst for selling, the selling behavior of these algorithms is not random. They exert pressure along the path of least resistance and greatest impact. By targeting a known gap, they can ensure that they precisely trigger stop-loss and liquidation orders clustered around that level. As the price is pushed toward the gap by the algorithms, human traders who also focus on the gap join the selling frenzy out of concern that the gap will be completely filled, further enhancing the downward momentum. Therefore, the gap is not the cause of the crash, but it becomes the destination of the crash.

Capital Game: The Selling of Whales and the Accumulation of ETFs

Beneath the surface price collapse in the market, a silent war over capital flows is unfolding. On-chain data evidence reveals starkly different behavior patterns among various market participants.

Data from on-chain analysis platforms such as CryptoQuant and Lookonchain shows that in the hours or even days leading up to the crash, large holders of Bitcoin, known as “whales,” 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.

In stark contrast to the distribution behavior of the whales, the newly established spot Bitcoin ETFs have continued their systematic buying pace. Analysts point out that “institutional demand continues to absorb supply,” and these ETFs have played a crucial support role during market downturns, preventing further price collapse. This represents a powerful, non-discretionary buying force in the market. Unlike whales that trade based on tactical demand, ETF purchasing behavior is dependent on client capital inflows, creating a stable and continuous demand flow that provides solid bottom support for prices. The game 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 hasn’t the price fallen lower?”

The road ahead is long: Navigating at the crossroads

After this storm, the market did not welcome calm, but instead entered a crossroads filled with confusion and divergence. Analysts’ comments also showed serious discrepancies. Some, like Nathan Peterson from Charles Schwab, suggested that investors “sell on rallies.” Others believe the market is in a “healthy buying zone on dips.” Ran Neuner, the founder of Crypto Banter, even predicted that Bitcoin could still reach $250,000 by the end of the year, while Michael Saylor, the founder of MicroStrategy, called this drop a “gift from God.”

Currently, the market is weighing the fear of economic recession in the short term against the bullish expectations of interest rate cuts by the Federal Reserve and a new round of liquidity injections in the medium to long term. This crash has fundamentally reset market dynamics, forcing every participant to reassess their investment logic. The future direction will depend on which type of capital group — short-term traders scared off by macro fears, or institutional investors committed to long-term accumulation — can exert greater influence. The large-scale liquidation events have washed away 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 cryptocurrency market.

Conclusion: Lessons from the Storm

The “August Storm” of 2025 is a multi-act play. It begins with the impacts of macro politics, which are infinitely amplified by a fragile and over-leveraged derivatives 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, this same integration also makes it highly susceptible to shocks from traditional markets and geopolitical events. The “August Storm” is the ultimate embodiment of this tension — a direct collision between old-world macro fears and new-world digital asset accumulation. The future of cryptocurrency will be defined by how it navigates between these two powerful and often opposing forces.