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Bitcoin Price Falls 14% Following Bitfinex 'Flash Crash'

(@GCaffyn) | Published on August 19, 2015 at 13:47 GMT
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UPDATE (20th August 17:56 BST): Comment added from Zane Tackett, BitFinex's director of community and product development.


Bitcoin's price fell 14% in a period of just 30 minutes following a 'flash crash' on exchange Bitfinex yesterday night.

The CoinDesk Bitcoin Price Index had been holding steady between $250 and $255, but dropped to a low of $214.36 just before midnight (UTC). In the same period, the Bitfinex price sunk 29% to $179.35.

coindesk-bpi-chart (10)

Bitfinex, which claims to be the most liquid exchange in the world, told CoinDesk the 'flash crash' was triggered when several leveraged positions were forcibly closed in close proximity to each other, adding:

"The surprisingly small amount of liquidity on the book below $225 made it possible for the market to spike lower before recovering to prevailing prices on other exchanges."

Alongside a regular buy/sell orderbook, Bitfinex offers margin trading, meaning users can borrow funds from the platform's lenders – known as 'peer liquidity providers' – at a rate of interest to trade bitcoin. These users place 'long' or 'short' bets on whether bitcoin's price will rise or fall.

When the price shifts suddenly, as it did yesterday, 'long' users who have borrowed funds may see their account equity drop to zero – at which point Bitfinex will automatically liquidate their positions.

This can exacerbate price movement, as these positions add to sell-side pressure on an already crashing market.

Circuit breakers

There are ways to mitigate against such drastic movements – some traditional exchanges put a 10% limit on price movements from the previous day's close for example.

Zane Tackett, BitFinex's director of community and product development, told CoinDesk the exchange does have such 'circuit breakers' in place for orders that will move the market beyond a certain percentage, however they were not triggered as it wasn't any singular order that caused the 'flash crash'.

He said:

"We are still examining the conditions surrounding the price action to ferret out any deliberate price manipulation, but so far we see nothing more than supply exceeding demand and, of course, areas for improvement in our price stability mechanisms."

In an interview with members of the 'Whale Club', Bitfinex's Phil Potter indicated the platform had experienced a number of technical difficulties, including a lag in its live engine that updates positions.

Margin trading

While a familiar part of most markets, margin trading is a relatively recent phenomenon in bitcoin, with two exchanges adding it in the last two months alone.

Timo Schlaefer, CEO of derivatives trading platform Crypto Facilities, told CoinDesk margin trading on spot exchanges destabilises the price and has lead to "numerous" flash crashes over the years. Last August, instances on Bitfinex and BTC-e were blamed for a 10% price decline.

"You need to make a decision if you want to be a robust spot exchange (ie no margin trading) or something else, but you cannot be both," he said, adding:

"This is bad for bitcoin as it shows that the market is still immature and unreliable and there seems to have been little progress in that regard over the last year or so."

However, not everyone agrees. A bitcoin market maker who wished to remain anonymous said flash crashes are not unique to markets with margin trading.

"You can do margin trading without it actually being offered by the platform itself, nothing prevents you going and borrowing money to fuel a gambling habit."

He claimed the "gambling mentality" in the bitcoin space, with traders happy to put a lot of money on the line with lot of leverage, exacerbated price moves. Meanwhile, the current uncertainty and "public bickering" over the Bitcoin XT fork is bound to affect the price negatively, he added.

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