Crypto Flash Crashes: What You Need to Know

Over the course of 2021, bitcoin's price experienced no less than six flash crashes.
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Benedict George is a freelance writer for CoinDesk. He has worked as a reporter on European oil markets since 2019 at Argus Media and his work has appeared in BreakerMag, MoneyWeek and The Sunday Times. He does not hold any cryptocurrency.

A cryptocurrency “flash crash” is a market event in which many holders of a particular crypto asset suddenly decide to sell, overwhelming buyers and forcing the price to fall sharply within a very short time period. The event differs from a regular crash in that the price tends to rebound very quickly, often ending up with the price close to its original level.

It is often difficult or impossible to establish a thorough explanation for a flash crash. In the aftermath of such an event, the crypto media typically devolves into disputes about the culprit or catalyst.

Early in 2021, crypto exchange Kraken was the scene of a flash crash in the price of Ethereum-based tokens. Across the board, their prices fell by more than 50%, before fully recovering within an hour. While some observers said a technical glitch could have been responsible, Kraken CEO Jesse Powell denied the rumor and suggested a single major holder might have “decided to dump his life savings”.

It’s possible heavy selling activity could be the work of one large player, but it’s more likely to be many investors moving all at once. An abrupt drop in price can generate panic, with traders escaping to cryptocurrencies with more stable value or fiat.

Flash crashes can occur beyond the immediate control of human beings. They may be produced by algorithmic trading programs, triggering one another to sell in a feedback loop. When such programs are managing large volumes of assets, the consequences of such a loop can be dramatic. This can then spill over into the futures market and cause a knock-on cascade of liquidations adding further momentum to the decline. Sometimes, a flash crash can be a result of intentional market manipulation or foul play, where large investors known as “whales” employ methods such as stop hunting or creating fake buy/sell walls.

Deliberate investment strategies can contribute to the common “bounce back” observed after a flash crash. When a price falls suddenly without an obvious reason, investors smell an opportunity to profit by buying an undervalued asset and rush to take advantage of it before the chance disappears.

The term “flash crash” comes from traditional finance. One of the most famous examples struck the U.S. stock market in 2010, and a British trader was subsequently arrested for his alleged role in causing it.

This article was originally published on Jan 12, 2022 at 4:24 p.m. UTC

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Benedict George is a freelance writer for CoinDesk. He has worked as a reporter on European oil markets since 2019 at Argus Media and his work has appeared in BreakerMag, MoneyWeek and The Sunday Times. He does not hold any cryptocurrency.

CoinDesk - Unknown

Benedict George is a freelance writer for CoinDesk. He has worked as a reporter on European oil markets since 2019 at Argus Media and his work has appeared in BreakerMag, MoneyWeek and The Sunday Times. He does not hold any cryptocurrency.

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