Crypto flash crashes: what you need to know

Some crypto traders see flash crashes as an opportunity to make a quick buck before the price rebounds. However, such trading is quite risky as it’s difficult to detect if a sudden drop in the price of a coin is a flash crash or a longer lasting price correction.

What is a flash crash in crypto?

In 2021, Bitcoin experienced a flash crash where the BTC price plummeted 90% from an all-time high of ,000 on the Binance exchange to a low of ,200. The flash crash was attributed to a bug in the trading algorithm of one market paricipant. It also affected other crypto assets like ether (ETH), which experienced a price decline from ,000 to ,000.
Coindesk reported another instance of a brief crash in the price of ETH earlier in 2022, where the price fell 15% from about ,765 to ,534 in around half an hour and rebounded almost immediately.
In June 2022, Chain token (XCN) lost over 90% of its value before recovering most of the losses later in the same day. The event was attributed to a technical API issue as reported by the developer’s team.
One of the potential solutions to prevent flash crashs that regulators of global exchanges like New York Stock Exchange (NYSE ) and Chicago Mercantile Exchange (CME) have explored is to implement circuit breakers that pause trading activities across the market when an asset drops below 10% in a 15 minute time frame.
Yes, Bitcoin has been subject to flash crashes on several occasions. The significant Bitcoin flash crash occurred in December 2021, when long positions worth about billion were wiped out from the market.

What causes crypto to crash?

Arguably the most notable flash crash occurred in the US stock market on May 6, 2010, when major stock indexes briefly crashed by up to 10%. Since then, flash crashes have happened several times in the crypto markets too.

Humans

In the crypto market, a ‘flash crash’ occurs when a crypto asset experiences a huge sell-off then quickly rebounds in a short period.
Crypto flash crashes have emerged as a recurring phenomenon in the volatile landscape of digital currencies. The sudden and short price drops can be triggered by a variety of factors including market manipulation, regulatory announcements, or technical glitches, and underscore the inherent risks associated with crypto investments.

Computers

Depending on the severity of the flash crash and the underlying causes, there may be long-term effects on the perception of cryptocurrencies as viable investment assets. Investors may become more cautious and risk-averse, leading to reduced adoption and slower growth of the market.
It’s quite difficult to attribute the cause of flash crashes in crypto to a single factor, however, they often occur as a result of both human and computer activities.

Examples of flash crashes

Algorithmic trading has created flash crashes in the past and often sets off a cascade of mass liquidation. Certain bots are programmed to use algorithmic solutions that recognize aberrations and automatically execute sell orders to avoid losses.
The impact of a flash crash in the cryptocurrency market can be significant and wide-ranging. Effects can include significant losses for investors, as those caught off guard by the price drop may not be able to exit their positions in time. This can erode confidence in the market and deter new investors from participating.
This was the case when Ethereum’s token (ETH) price plunged from over 0 to While flash crashes can present opportunities for seasoned traders to capitalize on, they also serve as a stark reminder of the importance of risk management and thorough due diligence in navigating the crypto markets.

Impact of a crypto flash crash

For example, a crypto asset is trading for 0.5 ETH and a high-frequency trading system has an algorithm that triggers sell orders when the price falls between 0.45 ETH and 0.55 ETH. As a result, a fall in the price to 0.45 ETH will trigger the automatic sell order, which may further push the price lower and continually trigger more algorithmic sell orders as the falls lower.
However, such measures are quite challenging to implement in the decentralized world of crypto where volatility is high and regulations are minimal. While centralized exchanges can pause trading activities, decentralized exchanges cannot since they aren’t governed by any central body.
Even if the decentralized autonomous organization (DAOs) that govern do intervene, the damage will often be done as their decision-making process is slow and flash crashes take place in a short space of time.

Conclusion

A crypto clash crash is an unexpected, sudden, and brief market crash typically caused by algorithmic trading programs.
In some events, whales facilitate flash crashes as a result of accidental trading, such as a fat-finger error, i.e., unintentionally placing an order at the wrong price or accidentally adding zero.

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