Hyperliquid's Recent Challenges: Shorting Scandal, Outflows, and Token Volatility

Hyperliquid, a prominent decentralized exchange (DEX) in the crypto space, has faced a series of high-profile challenges in late 2025, testing its resilience and governance structure. From a $4.9 million price manipulation attack to a $20 billion liquidation event and ongoing debates over tokenomics, the platform's struggles highlight the fragility of leveraged markets and the risks inherent in decentralized finance (DeFi). For investors evaluating the long-term viability of HYPE, the native token of Hyperliquid, these events demand a nuanced analysis of governance risks, market dynamics, and structural economic pressures.

The Shorting Scandal and Price Manipulation

In November 2025, Hyperliquid became the target of a sophisticated price manipulation attack involving the POPCAT token. Attackers distributed $3 million in USDC across 19 wallets to create long positions exceeding $20 million, artificially inflating the token's price before triggering a crash. This led to $4.9 million in losses, with the platform's community-owned liquidity vault absorbing nearly $5 million in bad debt. The incident underscored vulnerabilities in decentralized markets, where large actors can exploit liquidity imbalances to manipulate prices.

Simultaneously, a massive $20 billion liquidation event swept across crypto exchanges, with Hyperliquid reporting $10.3 billion in losses-the highest of any platform. A single trader, identified as 0xb317, capitalized on the chaos by shorting Bitcoin for $192 million in profits ahead of the U.S. announcing 100% tariffs on Chinese imports. This trader later opened a $163 million short position using 10x leverage, exacerbating the selloff. Hyperliquid's Auto-Deleveraging (ADL) mechanism, designed to liquidate profitable positions to cover insolvent ones, further amplified the crisis by forcing cascading liquidations.

The attack also revealed the influence of large actors in decentralized markets. A "Hyperliquid whale" holding over 100,000 BTC (worth $11 billion) was linked to Garrett Jin, former CEO of BitForex, though he denied ownership. These events collectively exposed the risks of concentrated power in DeFi ecosystems, where governance and liquidity are community-driven but vulnerable to exploitation.

Market Volatility and Liquidity Strains

Hyperliquid's November 2025 flash crash, during which Bitcoin plummeted from $83,307 to $80,255 in a minute, further tested the platform's resilience. Five accounts were liquidated, with the largest loss reaching $36.78 million. This crash occurred amid broader macroeconomic uncertainty, including a 36% drop in Bitcoin's price from its October peak and a $1 trillion loss in crypto market capitalization.

The platform's open interest dynamics reflected deep bearish sentiment, with 53.2% of its $5.29 billion in open interest favoring short positions. While this created opportunities for bearish traders-such as the 0x5D2F whale, who profited $51 million from Bitcoin shorting-long positions faced catastrophic losses. For instance, the HYPE whale 0x082 incurred a $10 million unrealized loss after a 126% price drop according to reports. These divergent outcomes highlight the fragility of leveraged markets, where volatility and leverage can rapidly shift fortunes.

Governance Risks and Tokenomics Under Scrutiny

The HYPE token's governance structure has become a focal point of debate, particularly following a proposal to permanently remove 37 million tokens (10% of the circulating supply) from circulation. These tokens, held in the Hyperliquid Assistance Fund (an address with no private key), are functionally burned but lack on-chain verification. The proposal seeks to codify their status through a validator-backed consensus, aiming to improve supply dynamics and investor confidence. However, critics argue that this move is largely cosmetic, as the ongoing unlock schedule-releasing 9.9 million HYPE tokens monthly for 24 months-continues to create selling pressure according to analysis.

At the time of the proposal, HYPE had already fallen 60% from its September peak, trading near $24 amid $70 million in long liquidations according to market data. Derivative indicators like Open Interest and funding rates showed a temporary bullish boost post-announcement, but technical indicators (RSI, MACD) remained bearish according to technical analysis. Analysts caution that the burn may stabilize the token only if the market interprets it as a credible commitment to scarcity, a challenge given the structural supply imbalances.

The unlock schedule, valued at $270 million monthly at current prices, further complicates the token's outlook. Hyperliquid's buyback program, funded by 97% of protocol fees, absorbs only $90 million monthly, leaving a $180 million gap that fuels net inflation. Early on-chain activity post-unlock saw 600,000 tokens sold within days, with large holders rapidly taking profits according to on-chain data. This pattern suggests that even a successful burn may struggle to counteract the persistent supply-side pressures.

Long-Term Investment Viability: A Balancing Act

For HYPE to regain investor confidence, Hyperliquid must address both structural and governance risks. The proposed token burn is a step toward aligning reported supply with economic reality, but it does not resolve the core issue of ongoing unlocks. A more sustainable approach would involve accelerating the burn rate or adjusting the unlock schedule to reduce net inflation. Additionally, the platform's ADL mechanism, designed to prevent cascading defaults, requires refinement to avoid exacerbating liquidation cycles during crises.

From a market perspective, Hyperliquid's dominance in perpetual DEX trading remains a strength, but competition from platforms offering aggressive incentives threatens its fee-driven buyback model according to market analysis. The token's performance will likely hinge on macroeconomic trends, regulatory clarity, and the platform's ability to innovate in liquidity provision.

Conclusion

Hyperliquid's recent challenges-ranging from price manipulation to governance debates-underscore the complexities of investing in DeFi tokens. While the proposed HYPE token burn and ADL mechanism aim to stabilize the ecosystem, structural supply pressures and macroeconomic headwinds pose significant risks. For long-term investors, the key will be monitoring whether Hyperliquid can execute meaningful tokenomic reforms and maintain its competitive edge in a rapidly evolving market. Until then, HYPE remains a high-risk, high-reward asset, with its trajectory dependent on both technical execution and broader market sentiment.