Investor sentiment and positioning matter most when an unexpected event occurs. Optimistic sentiment and leveraged longs, built on positive trends, are most vulnerable to negative news. Of course, the reverse is also true. Yesterday’s upside-crash reaction to the moderation in US inflation cannot be explained by a carefully calibrated re-rating of fundamentals. Leveraged risk management drove the moves. Digital asset markets have had no shortage of negative news in the past year, and FTX comes at a time when sentiment was already depressed. Derivative markets reinforce the point. The highest risk for de-leveraging comes when derivative exposure is large, driven by long demand that shows up with a steep forward curve. Take March 2020 as an example. Total bitcoin positions in futures were running at all-time highs. Funding rates were also high, with the one-month implied funding costs for bitcoin longs running ~20% annualized. Bullish speculative activity was extreme. A sudden stop in the global economy led to a brutal reversal – the implied interest rate on bitcoin futures flipped to more than –50%. Leveraged longs do not have the option of being long-term investors. But these are not reflective of current dynamics. Derivative activity was depressed into the FTX downturn, with open interest well off the highs, options markets defensively skewed to puts, and funding rates low. Of course, markets can still crash. And they did. But the speed of adjustment is much faster and with less consequence when leveraged activity is constrained. Severe negative funding rates are a sign of capitulation. We’re already seeing those. Solana's one-day funding rates fell to nearly –6%, not annualized, meaning those short needed a price decline of more than 6% before earning a return. There are a lot of unknowns to resolve. But the starting point isn’t from extreme bullish, leveraged exposure. We’re consolidating intermediaries, not culling speculative exposures.