Author: danny Source: X, @agintender
How whale exploited the right timing, location, and people in $XPL's pre-market trading on Hyperliquid to profit from it—that is, early holders hedged their positions by short, thus forming a "crowded trade" that was ultimately detonated by an "ignition strategy"—is not a random market fluctuation, but a systemic risk stemming from the structural flaws of the pre-market market.
The story begins with Aunt Ai’s tweet:
This article doesn't examine the circumstances surrounding the $XPL incident, but rather discusses some structural and systemic risks in the pre-market trading market. While every model has its advantages and disadvantages, this isn't a matter of right or wrong. This article aims to highlight these risks and their underlying causes.
Section 1: A New Paradigm: Pre-Market Trading
Pre-market trading (more accurately, "pre-launch trading") essentially creates a synthetic market for a token that hasn't yet been issued or publicly circulated. This isn't a reaction to information about existing assets, but rather a pure price discovery process for future assets. The underlying asset isn't the token itself, but rather a futures contract, which can be spot, over-the-counter, or perpetual.
This shift in mechanisms fundamentally alters the nature of risk. While the primary risks of traditional pre-market trading are insufficient liquidity and increased volatility, the existence and fundamental value of the asset remain unquestioned. However, the cryptocurrency pre-market introduces new risk dimensions: first, settlement or conversion risk. This involves the possibility that the project may never issue its tokens, preventing the market from converting to a standard spot or perpetual contract market and ultimately leading to suspension or delisting.
Secondly, there's the risk of price anchoring. Without an external spot market to serve as a price reference, market prices are entirely determined by buying and selling activity within the platform, forming a self-referential closed loop that makes the market more susceptible to manipulation. Therefore, the innovation of pre-market cryptocurrency trading lies in creating a market out of thin air, but at the cost of creating a structurally more fragile trading environment with a more diverse range of risks.
It’s not that everyone is unaware of this risk, but exchanges can obtain traffic, market makers can achieve “price discovery” in advance, and project parties/early investors can “hedge risks” - under the premise of multiple parties making profits, everyone acquiesces to this arrangement (risk).
Section 2: DEX hedging is like walking on a tightrope with a double-edged sword
2.1 Rational Hedgers: Why Early Holders Short Pre-Market Futures to Lock in Value
Before a new token's TGE (Tentative General Equity), early holders (including private investors, team members, and airdrop recipients) face a common dilemma: they hold tokens or token claims that are not yet circulated and tradable, exposing the future value of these assets to significant market uncertainty. Once the token goes public, its price could be far lower than expected, significantly reducing their paper wealth.
The pre-market futures market offers a near-perfect solution to this dilemma. By short an equivalent amount of perpetual swaps in the pre-market, holders can lock in the future selling price of their tokens in advance. For example, if a user expects to receive 10,000 airdrop tokens and the futures price of the token is $3 in the pre-market, they can hedge their risk by short 10,000 contracts. Regardless of the spot price at the time of the TGE, their total profit will be locked in at approximately $30,000 (ignoring transaction costs and basis). This operation essentially creates a delta-neutral position: the risk of the long spot position (holding the pending airdrop) is offset by the short futures position (short the perpetual swap). For any rational risk-averse person, this is a standard and sensible financial strategy.
2.2 The formation of a crowded trade: when collective hedging creates concentrated vulnerability
When a large number of market participants trade at the same time, using the same strategy and based on similar logic, "crowded trade" arises. This risk stems not from asset fundamentals (exogenous risk) but from the high correlation between market participants' behavior, making it an endogenous risk.
If you have watched the ALPACA episode before, you will know that this operation is a "market consensus" - where there is market consensus, there is direction; where there is direction, there are opportunities; where there are opportunities, there is speculation.
This crowding phenomenon is structural and predictable in the pre-market. The nature of airdrops and early token distributions creates a large, homogeneous group (i.e., token recipients) who, at the same point in time (pre-TGE), face the same exact risk exposure and have the same anticipatory motivation (short). Meanwhile, the group of speculators willing to take the risk and buy these futures contracts is relatively small and dispersed. This natural imbalance between long and short positions inevitably leads to extreme market crowding on the short side, creating a classic case of a crowded short.
The greatest danger of a crowded trade lies in its fragility. With the vast majority of investors on the same side of the boat, once a catalyst forces them to close their positions (such as an adverse price movement), there will be a shortage of counterparties in the market to absorb these closing orders. This triggers a stampede-like "escape from the exits," leading to extreme, drastic, one-way price movements. For crowded short positions, this stampede manifests as a devastating short squeeze. This hedging tool, originally intended for risk management, has, through its collective use, instead created a new and greater source of systemic risk.
2.3 Identifying Imbalances: Detecting Crowding Through Data Analysis
While an individual trader cannot know exactly how many people hold the same position as him or her, by analyzing publicly available market data, it is possible to effectively identify signs of crowded trading.
Open Interest (OI) Analysis : OI is a key indicator measuring the total number of open derivatives contracts in the market, reflecting the amount of capital flowing into the market and market participation. In the pre-market, if OI rises continuously and rapidly while prices stagnate or even decline slightly, it is a strong signal that a large amount of capital is pouring into short positions, forming a bearish consensus and a short crowd is forming.
On-chain data analysis : Although the tokens are not yet in circulation, analysts can track airdrop-related activity using blockchain explorers. By analyzing the number of wallets eligible for the airdrop, the concentration of token distribution, and the historical behavior of these wallets, it is possible to roughly estimate the total amount of "spot" positions that may require hedging. A large and dispersed airdrop often indicates stronger hedging demand and higher congestion risk.
Funding Rates and Spreads : On platforms with funding rates like Hyperliquid, persistently negative and deepening funding rates are direct evidence of short-term dominance. On platforms like Aevo, while lacking funding rates, widening bid-ask spreads and order book depth on the sell side significantly exceeding the buy side can also indicate unilateral selling pressure.
This series of analyses reveals a profound phenomenon: "crowded hedging" in the pre-market isn't an accident of market failure, but rather an inevitable product of systemic design. The airdrop mechanism creates a large, aligned group of traders, and the pre-market provides them with a perfect hedging tool. Individually rational behavior (hedging risk) converges into a collectively irrational state (an extremely vulnerable, crowded position). This vulnerability is predictable, systematically concentrating a large number of risk-averse traders, creating a perfect prey pool for predators who understand and are able to exploit this structural flaw.
A short squeeze/long squeeze does not require a reason, narrative, or purpose. Instead, when funds reach a certain level, they will attract whales and gamblers - the contract version of a crime of possessing a treasure .
Section 3: Ignition Moment: Exploiting Crowded Transactions and Triggering Chain Liquidations
3.1 Momentum Ignition: A Mechanism of Predatory Trading Strategies
Momentum ignition is a complex market manipulation strategy typically executed by high-frequency traders or large trading funds. Its core objective is not based on fundamental analysis, but rather on creating artificial unilateral price momentum through a series of rapid, aggressive trades. The goal is to trigger pre-set stop-loss orders or forced liquidation levels in the market, and then profit from the resulting chain reaction.
The execution of this strategy usually follows a precise "attack sequence":
Probing and preparation: The attacker will first test the market's liquidity depth by submitting a series of small, rapid orders to create the illusion of growing demand.
Aggressive order placement: After confirming that the market depth is insufficient, the attacker will flood the order book with a large number of market buy orders in a very short period of time. The goal of this stage is to quickly and violently drive up the price.
Triggering a chain reaction: The sharp rise in price hits the forced liquidation price for a large number of crowded short positions. Once the first liquidation is triggered, the exchange’s risk engine automatically executes a market buy order to close the short position, further pushing up the price.
Profit-taking: The initial attackers had already built up a large number of long positions in phases 1 and 2. When the cascading liquidations began and a large amount of passive buying flooded the market, the attackers began to reverse course, selling their long positions to these forced liquidation buyers, thereby realizing profits at the inflated prices they had created.
3.2 Perfect Prey: How Illiquidity and Short Crowd Create an Ideal Attack Environment
The pre-market provides a near-perfect breeding ground for implementing a momentum ignition strategy.
Extremely Low Liquidity: As mentioned previously, the pre-market market is extremely illiquid. This means attackers can significantly impact prices with relatively little capital. Manipulation that would be costly in liquid, mature markets becomes inexpensive and efficient in the pre-market.
Predictable Liquidation Clusters: Because a large number of hedgers use similar entry prices and leverage, their forced liquidation prices are densely distributed within a narrow range above the market price. This creates a clear and predictable "liquidation cluster." Attackers know that they only need to push the price up to this area to trigger a chain reaction. This is consistent with the "stop-loss hunting" behavior in traditional markets, where attackers specifically target known areas with concentrated stop-loss orders. (via liquidation map)
One-sided market structure: Crowded shorts mean that during price increases, there is little natural buying power to absorb attacker selling pressure. Prices can rise effortlessly until they hit the "wall" of liquidation clusters. Once there, passive liquidation buying becomes the "fuel" that drives prices further up.
3.3 Disintegration: From Targeted Elimination to Comprehensive Chain Liquidation
The whole process was a carefully planned, staged disintegration.
Short Squeeze: The initial price surge triggered by the momentum ignition strategy triggers the liquidation of the first batch of the most leveraged and vulnerable short positions. The buying generated by these forced liquidations further pushes prices higher, forming a classic short squeeze.
Cascading liquidations: Prices, driven high by the first round of short squeezes, now reach the liquidation levels for the second and third tranches of short positions. This creates a vicious positive feedback loop: liquidations lead to higher prices, which in turn trigger more liquidations. The market spirals out of control, with prices rising vertically in a very short period of time, forming the long upper shadow candlesticks commonly seen on charts, known as "liar candlesticks."
The ultimate outcome: For early holders seeking to hedge, the outcome is a "margin call"—margin depleted, hedged positions forced to close, and significant financial losses. Not only do they lose the "insurance" they established to protect the spot value, but they also pay a heavy price for it. When the cascading liquidation exhausts all available short positions and the attackers complete their profit-taking, the price often quickly falls back to its initial level, leaving a devastating mess in their wake.
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 at all, but more like a game between funds.
It's a form of structural arbitrage based on flaws in market microstructure. Attackers exploit publicly available information (airdrop size), platform design (leverage mechanisms), and predictable group behavior (collective hedging). By calculating the cost of the attack (the funds required to drive up prices in a low-liquidity market) and the potential reward (profits after triggering a liquidation cluster), they execute a near-deterministic game. Their profits come not from accurate judgments about asset value, but from the precise exploitation and amplification of market failures.
Know the fact and why it is so
May we always maintain a sense of awe for the market.
