The Hidden Dangers of Centralized Crypto Exchanges: Systemic Underreporting of Liquidation Risks and Its Impact on Investor Strategies

The crypto market's reliance on leveraged trading has always been a double-edged sword. While it amplifies gains, it also magnifies systemic risks-particularly when key data about liquidations is obscured. Centralized exchanges (CEXs), which dominate the industry, have come under fire for allegedly underreporting liquidation volumes by as much as 100 times during volatile periods. This practice, critics argue, creates a distorted view of market stability, leaving investors ill-prepared for cascading liquidation events that can erase billions in hours.

The Mechanics of Underreporting

According to a CoinTelegraph report, Binance and other major CEXs employ a reporting methodology that captures only the latest liquidation within each second interval, effectively discarding earlier trades in the same timeframe. Hyperliquid CEO Jeff Yan, a vocal critic of this approach, has highlighted how this method skews data during high-volatility events, when liquidations often occur in rapid bursts. For instance, during a flash crash in October 2025, $19 billion in futures positions were liquidated within 24 hours, yet Binance's reported figures likely missed the majority of these events.

This underreporting is not accidental. K33 Research's analysis revealed that exchanges like Binance, Bybit, and OKX began modifying their liquidation data reporting processes as early as mid-2021, citing "optimizing user data streams" as a justification. However, the result has been a three-year distortion of market dynamics, misleading traders about leverage ratios and risk exposure. Bybit CEO Ben Zhou recently underscored this issue, noting a $2.1 billion internal liquidation figure versus Coinglass's reported $333 million, as reported in a CoinRepubliq report. Such discrepancies raise urgent questions about the reliability of market analytics tools used by investors.

Real-World Consequences: Case Studies in Chaos

The implications of underreported liquidations are starkly evident in recent market crashes. In September 2025, a "Red September" crisis triggered by a NovaTrade security breach and the de-pegging of AxiomUSD led to a $1.5 billion liquidation wave, wiping out leveraged long positions in Bitcoin and Ethereum, as reported by CoinTelegraph. Investors, unaware of the true scale of liquidations, were caught off guard by the speed and severity of the downturn.

A more extreme example emerged in October 2025, when Trump's 100% tariff announcement on Chinese imports sparked a global risk-off wave. Over $16 billion in long positions were liquidated in 24 hours, with altcoins suffering flash crashes of 50–90%, according to K33 Research. Academic research by Easley and O'Hara (2024) further underscores the systemic fragility: up to 60% of price swings during high-volatility events are attributed to cascading liquidations rather than new information, a dynamic highlighted in reporting by CoinRepubliq. This feedback loop-where forced selling absorbs liquidity and exacerbates price drops-has become a defining feature of crypto markets.

Regulatory Responses and Investor Behavior

Regulators are beginning to take notice. In South Korea, the Financial Services Commission (FSC) froze new crypto lending services in August 2025 after a cascading liquidation crisis erased ₩1.5 trillion (≈ $1.1 billion) in leveraged loans, according to CoinTelegraph. Meanwhile, in the U.S., Crypto.com CEO Kris Marszalek called for a probe into exchanges following a $20 billion liquidation event, citing concerns about potential manipulation and technical failures-an issue highlighted in K33 Research's reporting.

Investor behavior has also shifted in response. Post-2025 crash, many traders have moved to decentralized platforms like Hyperliquid, which offer full on-chain visibility into liquidations and funding rates, as noted by CoinRepubliq. This migration reflects a growing demand for transparency, as investors seek to avoid the "black box" nature of CEXs.

The Path Forward: Transparency and Risk Management

For investors, the lesson is clear: underreported liquidation data undermines the accuracy of risk models. Traditional risk management strategies, such as stop-loss orders, may prove ineffective if exchanges fail to execute them during crashes. As CoinGlass data shows, Binance's technical issues during the October 2025 crash-including frozen buttons and failed stop orders-highlighted the fragility of centralized infrastructure.

Decentralized finance (DeFi) platforms, by contrast, provide verifiable, real-time data. However, their adoption remains limited, and many investors still rely on CEXs for liquidity and leverage. To bridge this gap, industry-wide standards for liquidation reporting are needed. Regulators must also step in to enforce transparency, ensuring that exchanges disclose their methodologies and avoid practices that distort market signals.

Conclusion

The underreporting of liquidation risks by centralized exchanges is not a minor oversight-it is a systemic flaw with profound implications for market stability and investor trust. As the crypto industry matures, the demand for transparency will only intensify. Investors must remain vigilant, diversify their exposure, and advocate for regulatory frameworks that prioritize accuracy over convenience. In a market where volatility is inevitable, the true risk lies not in the crashes themselves, but in the data that fails to prepare us for them.