jakiro
Author: danny Source: X, @agintender
How the giant whale uses $XPL to trade in Hyperliquid before the market is right for the time, place and harvesting masters – that is, early holders hedge by short selling, thus forming a “crowded transaction” and ultimately being detonated by the “ignition strategy” – is not accidental market fluctuations, but a systemic risk originating from structural defects in the pre-market market.
The matter starts with Aunt Ai’s tweet:
This article does not evaluate the ins and outs of the $XPL incident, but wants to talk to you about some structural and systemic risk points of the “pre-market trading market”.If there is an advantage in the model, there is a disadvantage. This matter has nothing to do with the right or wrong. This article aims to point out the risks and the reasons for it.
Section 1, a new paradigm: pre-market trading
At the heart of pre-market trading (more precisely “pre-Launch Trading” or “Pre-Launch Trading”) is to create a synthetic market for a token that has not yet been issued or publicly circulated.This is not a reaction to existing asset information, but a purely price discovery process for future assets.The transaction target is not the token itself, but a kind of futures. Some platforms are spot, some forward OTC, and some are perpetual contracts.
This mechanism shift fundamentally changes the nature of the risk.The main risks of traditional pre-market trading are insufficient liquidity and intensified volatility, but the existence and basic value of assets are unquestionable.The cryptocurrency pre-market market has introduced a new risk dimension: first, settlement risk or conversion risk, that is, the project party may never issue tokens, resulting in the market being unable to convert to a standard spot or perpetual contract market, and may eventually be suspended or removed from the shelves.
The second is price anchoring risk. Since there is no external spot market as a price reference, the market price is completely determined by the trading behavior within the platform, forming a self-referenced closed loop, which makes the market more susceptible to manipulation.Therefore, the innovation of cryptocurrency pre-market trading is to create a market out of thin air, but at the cost of building a more structurally fragile and more diverse trading environment.
It’s not that everyone doesn’t know about this risk, but exchanges can obtain traffic, market makers can achieve “price discovery” in advance, and project parties/early investors can “held risks” – On the premise that multiple parties make profits, everyone acquiesced to this arrangement (risk).
The second section, DEX hedging is blindfolded and playing a double-edged sword on the wire.
2.1 Rational hedgeers: Why early holders short pre-trade futures to lock in value
A new token was before TGE, its early holders (including private equity investors, team members, airdrop receivers, etc.) faced a common dilemma: they held tokens or token acquisition rights that were not yet circulated and untraded, but the value of these future assets was exposed to huge market uncertainty.Once the token is traded online, its price may be much lower than expected, resulting in a sharp decline in paper wealth.
The pre-market futures market provides a near-perfect solution to this dilemma.By shorting the same amount of perpetual contracts in the pre-market market, holders can lock in the selling price of their future tokens in advance.For example, an airdrop user who is expected to receive 10,000 tokens can hedge the risk if the futures price of the token is $3 in the pre-market market.Regardless of the spot price at TGE, its total gain will be locked at about $30,000 (ignoring transaction costs and basis).The essence of this operation is to build a delta-neutral position: the risk of its spot longs (holding airdrops to be claimed) is offset by its futures shorts (short perpetual contracts).This is a standard and wise financial operation for any rational risk aversion.
2.2 The formation of crowded transactions: When collective hedging creates concentrated vulnerability
“Crowded Trade” comes into being when a large number of market participants trade based on similar logic, at the same time, and using the same strategy.This risk does not originate from the asset fundamentals (exogenetic risk), but from the high correlation of market participants’ behavior and is an endogenous risk.
If you have watched the ALPACA issue before, you will know that this operation is a “market consensus” – if there is a market consensus, there is direction; if there is direction, there is opportunity; if there is opportunity, there is game.
In the pre-market market, this crowding phenomenon is structural and predictable.The nature of airdrops and early token allocations determines that there will be a large, homogeneous group (i.e. token recipients) who face exactly the same risk exposure at the same point in time (before TGE) and have exactly the same impulse motivation (short selling).At the same time, the group of speculators willing to take risks and buy these futures contracts is relatively small and scattered.This natural long-short imbalance inevitably leads to extreme crowding in the market in the short direction, forming a typical crowded short seller.
The greatest danger of crowded transactions is their vulnerability.Since the vast majority of people are on the same side of the ship, once there is a catalyst that forces them to close their positions (such as reverse fluctuations in prices), the market will lack sufficient opponents to absorb these closing orders.This will trigger a “step-by-step” “escape from exports”, resulting in extreme and violent one-way movements in the price.For crowded short positions, this stampede manifests as a devastating short squeeze.This hedging tool, originally used for risk management, has created a new and larger systemic risk point due to its collective use.
2.3 Identify imbalances: Detect congestion through data analysis
While individual traders cannot know exactly how many people hold the same position as themselves, signs of crowded trading can be effectively identified by analyzing public market data.
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OI analysis of open contracts:OI is a key indicator for measuring the total number of open derivative contracts in the market, reflecting the total amount of funds flowing into that market and market participation.In the pre-market market, if OI continues and rises rapidly, while prices stagnate or even fall slightly, this is a strong signal that a large amount of funds are pouring into short positions, forming a bearish consensus that crowded short positions are forming.
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On-chain data analysis: Although the tokens are not yet available, analysts can track airdrop-related activities through a blockchain browser.By analyzing the number of wallets that meet the airdrop conditions, the concentration of token allocations, and the historical behavior of these wallets, the total number of “spot” positions that potentially need to be hedged can be roughly estimated.A huge and dispersed airdrop often indicates stronger hedging demand and higher risk of congestion.
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Funding rate and price difference: On platforms like Hyperliquid with funding rates, the continuous negative and deepening funding rates are direct evidence that shorts dominate.On platforms like Aevo, although there is no capital fee rate, the continuously expanding bid-to-sell spread and the order book depth on one side that is much larger than the order book on the buying side can also reflect the unilateral selling pressure.
This series of analysis reveals a profound phenomenon: the “crowding hedging” in the pre-market market is not an accident of market failure, but an inevitable product of system design.The airdrop mechanism creates a large and consistently motivated group, and the pre-market market provides them with the perfect hedging tool.Rational behavior at the individual level (held risk) converges into an irrational state at the collective level (an extremely fragile and crowded position).This vulnerability is predictable, systematically gathering a large number of risk-loss traders to create a perfect prey pool for predators who understand and have the ability to exploit this structural flaw.
Short squeeze/long does not require reason, narrative, or purpose, but when the funds reach a certain level, it will attract whales and games – the contract version of the crime of possessing a treasure.
Section 3: Ignition Moment: Using crowded transactions and triggering chain clearing
3.1 Momentum ignition: a mechanism for predatory trading strategies
Momentum Ignition is a complex market manipulation strategy that is usually executed by high-frequency traders or large-scale trading funds.Its core goal is not based on fundamental analysis, but artificially creates a one-way momentum of price through a series of fast and radical transactions, aiming to trigger a preset stop loss order or forced closing (clearing) line in the market, and then make a profit from the chain reaction caused by this.
The execution of this strategy usually follows an exact “attack sequence”:
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Detection and preparation: Attackers will first test the depth of the market by submitting a series of small, fast orders and create the illusion that demand is growing.
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Aggressive order: After confirming that the market depth is insufficient, the attacker will violently impact the seller of the order book through a large number of market price purchases in a very short time.The goal of this stage is to push up prices quickly and violently.
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Triggering the chain reaction: a sharp rise in prices will touch the forced liquidation price of a large number of crowded short positions.Once the first liquidation is triggered, the exchange’s risk engine will automatically execute the market price to close the short position, which further pushes up the price.
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Reap profits: The initial attacker has established a large number of long positions in the first and second phases.When chain liquidation begins and a large number of passive buying orders pour into the market, the attacker begins to operate in reverse, selling his long positions to these buyers who have been forced to close their positions, thereby achieving profits at the inflated prices he has created.
3.2 Perfect Prey: How illiquidity and crowded shorts create an ideal attack environment
The pre-market market provides a nearly perfect breeding ground for the implementation of momentum ignition strategies.
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Very low liquidity: As mentioned earlier, the pre-market market liquidity is extremely lacking.This means that attackers can have a huge impact on prices with relatively little capital.Manipulation can be expensive in mature markets with abundant liquidity and becomes inexpensive and efficient in pre-market markets.
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Predictable clearing clusters: Because a large number of hedgeers adopt similar entry prices and leverage ratios, their forced liquidation prices will be densely distributed within a narrow range above the market price.This creates a clear and predictable “cleaning cluster”.The attackers are very clear that they just need to push the price up to this area to detonate the entire chain reaction.This is consistent with the logic of “hunting stop loss” behavior in traditional markets, that is, the attacker specifically attacks against known stop loss order dense areas.(via liquidation map)
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Unilateral market structure: Crowded shorts mean that there is almost no natural buyer force to absorb the selling pressure of attackers during the price increase.Prices can go up effortlessly until they hit the “wall” of the liquidation cluster.Once it hits, passive liquidation buying becomes the “fuel” that drives prices to continue to rise.
3.3 Disintegration: From fixed-point clearance to comprehensive chain liquidation
The whole process was a carefully planned and phased collapse.
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Short squeeze: The initial price surge caused by the momentum ignition strategy will first trigger the liquidation of the first batch of the highest leverage and most fragile short positions.The buying orders generated by forced closing of these positions further pushed up the price and formed a typical short squeeze.
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Chain liquidation: The price pushed up by the first round of short squeeze has now reached the liquidation line of the second and third batches of short positions.This forms a vicious positive feedback loop: liquidation leads to price increases, and price increases triggers more liquidation.The market has entered a state of out-of-control, and the price has risen vertically in a very short period of time, forming a common and long upper shadow on the chart, namely the so-called “scammer candle”.
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Final ending: For those early holders who seek hedging, their ending is a “lose position” – margin is exhausted, hedging positions are forced to close, and huge capital losses are suffered.Not only did they lose the “insurance” established to protect the spot value, they paid a heavy price for it.When the chain liquidation exhausts all short positions available for liquidation and the attacker completes profit harvesting, the price tends to quickly fall back to its initial level, leaving a mess.
From a deeper analysis, the momentum ignition strategy in the pre-market market has gone beyond the scope of simple market manipulation, or it is not market manipulation, but more like a game between funds.
It is a structural arbitrage based on the microstructure defects of the market.The attacker uses public information (airdrop scale), platform design (leverage mechanism), and predictable group behavior (collective hedging), and executes a nearly certain game by calculating the cost of attack (the funds required to push up prices in a low-liquid market) and potential returns (profits after detonating the liquidation cluster).Their profits do not come from the correct judgment of asset value, but from the precise utilization and amplification of market failures.
Know the truth, and know the reason
May we always maintain a sense of fear of the market.
