Perpetual contract hedging failure? The painful lessons and alternatives of the “10.11” liquidation

Brothers, do you still remember the bloody storm in October 2025? In just 90 minutes, positions ranging from 19 billion to 40 billion US dollars were wiped out, setting a record for the largest liquidation in the history of the cryptocurrency industry. The most ironic thing is that many of the people who were buried this time were not retail investors, but professional players who thought they had made a "perfect hedge".

The "10.11" liquidation tells us a truth with bloody facts: **perpetual contracts may not be the "hedging artifact" you imagined at all. It is more like a "plastic shield" that is effective when the weather is calm and is the first to fall off when the storms **.

Today, let’s break it down and talk about why perpetual contract hedging fails, and if you really need to manage risk, what is a more reliable way to go?

1. Perpetual Contract Hedging: The ideal is full, the reality is skinny

First of all, it must be clear that hedging is a good idea. Its core is to establish an opposite position to offset the price fluctuation risk of the main position. A good hedging strategy needs to have several key characteristics: it is effective no matter how the market falls (path is independent), it cannot be lost at critical moments (the counterparty is reliable), the costs are clear, and the protection can be enhanced when the market deteriorates.

Perpetual contracts sound like they are tailor-made for hedging: they have no expiration date, can be held forever, and there is a funding rate mechanism to tie them to the spot price. Theoretically, if you open a short order with 1x leverage, you can hedge the equivalent long spot risk, and the capital efficiency "seems" to be very high.

But the "10.11" incident was like a stress test, exposing the fragile structure under this gorgeous theory. Perpetual contracts actually transform pure market price risk into more complex and uncontrollable "operational risk". When extreme market conditions strike, these risks will explode like dominoes.

2. Three fatal reasons why the “10.11” hedging strategy failed

1. Automatic reduction (ADL): a mechanism designed to kill “top students”

This is the last line of defense for centralized exchanges (CEX). When there are too many liquidated positions and even the insurance fund cannot cover the losses, the exchange will activate ADL and forcefully liquidate part of the profitable positions to fill the hole of the losing positions.

The problem is that ADL's algorithm (such as Binance's formula: Profit and Loss Percent × Effective Leverage) specifically focuses on those most profitable positions with higher leverage. what does that mean? This means that your short position that is used for hedging and is making money is likely to be forcibly "requisitioned" by the exchange to close the position when it is needed most during the storm!

Imagine this: You use 3x leverage to go long BTC spot at $120,000, and at the same time open a short hedge of equal value. The plunge came and your short order started to make a profit, but because it was profitable and the leverage was not low, it was selected by the ADL system to be forced to close the position. The result is that you lose your protection in an instant, expose a highly leveraged long position, and then watch it be liquidated - The hedging not only fails to protect you, but actually accelerates your death. According to reports, Hyperliquid alone performed 35,000 ADLs during the “10.11” period.

2. Market makers collectively “run away” and liquidity evaporated instantly.

Do you think the perpetual contract market has sufficient liquidity 24/7? In normal days, yes, but during the "10.11" period, data monitoring showed that the market depth of major trading pairs plummeted by 98%! Market makers are not gods, and they may also use perpetual contracts to hedge their inventories. When ADL occurs, their own hedging positions may also be liquidated. In order to protect themselves, their only choice is to withdraw all quotes and survive first.

As a result, an ironic scene emerged: when liquidity was most needed to smooth fluctuations and execute transactions, the liquidity of the entire market dried up. This results in huge price slippage, and even prevents your stop loss order from being filled at the expected price.

3. Oracle failure and cross-margin: the trigger of chain reaction

Many liquidations are not because the assets themselves have fallen so much, but because the exchange's Oracle quotes are wrong. For example, at that time, the mark prices of assets such as wBETH and USDe in CEX collapsed instantly, but this was not their true value outside the exchange.

What’s even scarier is the cross-margin mechanism. Nowadays, mainstream exchanges encourage you to use the same margin pool to support all positions, euphemistically called "improving capital efficiency." However, when the oracle incorrectly shows that your wBETH position plummets by 89%, it will instantly swallow up all the margin in your account, impairing your other completely unrelated, or even hedging BTC positions. A local, wrong risk is transmitted to your entire portfolio through the cross-margin system.

3. XPL Incident: Even 1x leverage is not safe in the face of hedging

If "10.11" is a systemic risk, then the XPL/Plasma incident in August 2025 shows how vulnerable hedging is in a market with insufficient liquidity.

Before the token was officially launched, some traders shorted the XPL perpetual contract through platforms such as Hyperliquid in an attempt to lock in the value of the airdropped token. They think to themselves: "I only use 1x leverage, and I won't liquidate my position until the price rises 100%. Is this safe?"

As a result, the giant whale took advantage of the thin pre-market liquidity and directly pushed the price up by 200% with a wave of pullbacks. The "safety pad" of 1x leverage is meaningless in the face of absolute manipulation. A trader's cry is typical: "1x hedging, the account was destroyed, and I lost half of my XPL allocation." You originally wanted to use hedging to reduce the risk, but in the end the loss was greater than simply holding spot. This is the paradox of hedging.

4. If you have to hedge permanently, how to reduce the risk? (strongly not recommended)

Despite what has been said above, I know that in some scenarios, some traders may still not be able to avoid perpetual contracts. If you insist on doing this, please at least abide by the following "life-saving rules", which can only reduce the risk, but cannot eliminate it:

• Prepare more capital than you think: Forget about the so-called "capital efficiency". Want to safely hedge a $100,000 BTC position? Under normal fluctuations, please prepare a principal of at least 140,000 US dollars; in a high-pressure period such as "10.11", 165,000 US dollars are required; if it is a pre-launch token, please prepare more than 250,000 US dollars. **If the principal is less than 1.5-2 times the value of the position, don't hedge. The risks you create are greater than the risks you want to avoid. **

• Mandatory Stop Loss and Take Profit: Never open a hedging order without an exit strategy. Delta neutrality is not a "set and forget it." Depending on your leverage and buffer funds, clearly set a stop loss point (for example, close the position at 15%-50% against the trend). At the same time, hedging also has costs (funding rates, opportunity costs), so remember to set a take-profit.

• Multi-platform decentralization: Never put all your hedging positions on one exchange. Scattered on at least 3 or more mainstream platforms. For example, 40% is on Binance, 35% is on Bybit, and 25% is on OKX. Also, ensure that the margin pools of different platforms are independent and do not correlate across platforms.

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• Leverage is limited to 1x: Hedging positions, if the leverage exceeds 1x, you are playing with fire. To hedge a position of 1 million, just prepare a deposit of 1 million, plus a buffer of 30%-50%.

• Almost perverted monitoring: The entire liquidation cycle of "10.11" was only 90 minutes, and it may be faster next time. It’s useless to expect “I’ll check it before going to bed” or “set a reminder on my phone”. What you need is a 24/7 professional monitoring team and automated system, which is extremely costly for individuals and small teams (hundreds of thousands of dollars per year). If you can't, the conclusion is simple: You shouldn't use a perpetual hedging strategy.

5. The real alternative: give up illusions and get down to earth

For 95% of the participants in the market, the best positioning of perpetual contracts is as a speculative tool rather than a hedging tool. Here are some more practical alternatives:

• VC/Project Party: Consider over-the-counter (OTC) or structured products to manage unlocking risks. Accepting certain directional risks is better than creating new operational risks in the contract market.
• Hedge Funds/Professional Institutions: Explore tail risk options in traditional financial markets, CME futures, or directly adjust the size of spot positions. Perpetual contracts should only be used for short-term tactical arbitrage.
• Lumao Party/Retail Investors: The simplest and most direct method: **Sell the tokens in batches immediately after they are listed (TGE). It is far safer to place sell orders with limit orders and accept market price fluctuations than to gamble against giant whales in the immature pre-release contract market.
• All Traders: The best hedges are often those that require no hedging. Control position sizes so they can withstand market drawdowns; adhere to profit-taking principles; and engage in true diversification across asset classes. Acknowledging that some risks cannot be perfectly hedged, the core of managing risks lies in avoiding and enduring them, rather than using more complex tools to "hedge" them.

Conclusion: Return to common sense and respect the market

The “10.11” liquidation sounded the alarm for the entire industry. It’s time to stop packaging perpetual contracts as universal risk management tools. It can be a powerful tool for speculation, arbitrage and price discovery, but its inherent mechanisms (ADL, reliance on market makers, oracle risks) determine that it cannot become a reliable "safe haven" under extreme pressure.

The best risk control in the cryptocurrency market starts with the simplest principles: low leverage, reasonable position management, and diversified investment that "does not put eggs in one basket". Before deciding to use any derivatives, ask yourself: Do I really understand and can bear the risks it brings beyond the market itself?

Final safety reminder: Regardless of spot or contract trading, choosing a regular, licensed, and top-level exchange is the first safety rule. Stay away from those "pheasant places" that are unknown, have poor liquidity, and have opaque rules. They are the hardest hit areas for escape and manipulation. Choosing a safe channel from the beginning of registration is the first step to protect yourself.

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