Bitcoin Price Falls 14% Following Bitfinex 'Flash Crash'

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.

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.

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:

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.

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:

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

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.