Bitcoin Flash Crash

Bitcoin traders are used to volatility but within reason. The market commonly rises or falls and then corrects. However, recently on the BitMEX market there was a brief period of volatility that took the value of Bitcoin down from its current all-time highs to levels far below its crypto winter lows! This was a Bitcoin flash crash. It only happened on the BitMEX market and did not spill over into other markets. It did not affect derivatives in that market either.

What Is a Flash Crash?

Flash crashes came into being along with electronic markets. A famous one was on May 6, 2010 when trillions of dollars of equity were erased in the US Dow Jones Industrials. Electronic trades caused an extremely fast selloff. This can happen over just a couple of minutes. In markets ranging from crypto to stocks to commodity futures many “mini flash crashes” happen every day. By the end of the day it may appear as though the flash crash never happened. Such was the case with the recent Bitcoin flash crash. The blame for flash crashes can usually be attributed to algorithmic, high frequency trading programs.

Bitcoin Flash Crash

What Caused the BitMEX Flash Crash?

BitMEX says it is investigating to determine the cause or causes of the flash crash of Bitcoin. According to Bloomberg it may have started with the sale of 977 Bitcoin worth roughly $66 million. A rational human Bitcoin trader would perhaps use this information to buy or sell in reasonable amounts in order to make short term profits. A rational human investor might have purchased on what they thought was going to be a market low. However, an algorithmic trading program within a high frequency trading program may well have overreacted to this. Thus what would have been a small step down in the market turned into a rapid collapse of the price of Bitcoin. This lasted about 10 minutes as a Bitcoin “whale” dumped tokens.

Can You Profit From a Bitcoin Flash Crash?

The ability to profit when a market crashes depends on a trader being aware of what is going on. In the case of the recent flash crash there was no reason to expect Bitcoin to lose 85% of its value. There was no change in the spot Bitcoin ETF picture. Interest rates are done going up, which started the last crash. Similar to a short squeeze, factors within a particular market involving a limited number of traders are driving prices. It is generally safe to predict that prices will return to their prior levels when current issues are sorted out. As such, one could profit from a flash crash by purchasing at rock bottom prices, providing that the trader was at their trade station and ready to act during the ten minutes that this occurred! It also assumes that they had an account with the exchange that they could rapidly access within the few minutes available!

Can You Get Hurt by a Bitcoin Flash Crash?

Anyone who was engaged in algorithmic trading and whose program assumed that the flash crash represented in genuine collapse of the Bitcoin market may have sold in a panic and then realized huge losses as the BitMEX market price for Bitcoin recovered. It appears, according to BitMEX, that trading during the short term price fluctuation was pretty much limited to a “whale” selling a huge number of tokens. When that ceased the price of Bitcoin on BitMEX rose again to normal levels. In other words, the seller was hurt by dumping Bitcoin at excessively low prices rather than selling gradually over time. Meanwhile, a number of traders picked up Bitcoin and extremely attractive prices before the market corrected when the “whale” stopped selling.

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