What is Flash Crash?
Human errors often cause extraordinary phenomena in the asset exchange market. However, this is not just human error — even software bugs are known to have a big impact. In markets like the cryptocurrency market, this is known as a Flash Crash.
A Flash Crash is a quick, deep drop in price and then a quick recovery back to the original level within seconds or minutes. What’s more special is that they occur without any meaningful or reasonably explainable reason, i.e. it is difficult to determine why the sharp drop happened all of a sudden.
Unlike the usual ascending and descending price movements that can be found in charts, Flash Crash is a drop that exceeds the statistical value of a few minutes and its price almost completely reverses, with no signs of recovery. In general, this is only possible with assets that have a small volume and happen unexpectedly. The depth will depend on the market in which it occurs. While a normal decline can indicate a definite recovery, prices do not always recover quickly.
Background of the market
The cryptocurrency market is still in its infancy. The market capitalization of the entire ecosystem is only about $120 billion, while Apple’s alone is more than $800 billion. The lower the market cap, the greater the volatility. If an exchange shows signs of low liquidity, the likelihood of Flash Crash events increases.
Before learning how these sudden drops can happen, it is important to understand liquidity. This is the ability to convert the cryptocurrency you purchased on the exchange into fiat, USDT, BTC or other cryptocurrencies. The higher the liquidity, the faster and better the price action will be. Low liquidity platforms make it harder to sell these assets, with the spread between the bid and ask prices widening.
What Causes Flash Crash?
There are several theories as to what could cause Flash Crash.
Fat Finger Phenomenon
Ethereum — June 21, 2017 — From opening candle at $352.45 to closing at $13.88 low.
A Flash Crash depends on the liquidity of the exchange, where the user tries to sell a substantial amount of money. For example, when Market Orders sell 10 million Ether, those Orders will fill the entire Order Book and, therefore, Ether will be sold for much less than the original price. This can be done by accident, hence the name Fat Finger.
On April 23, 2019, this phenomenon happened again on the world’s largest exchange, Binance, you can see it there.
Another theory, some view it as a simple market phenomenon, involves the Domino effect causing hundreds of Stop Orders, Stop Loss and Margin Orders. trap) is matched. When the price drops suddenly, those orders will be filled in mass creating such great demand that it will push the price lower than it can recover.
There are also other similar operations that can cause unexpected problems like Flash Crash.
A price manipulation scheme refers to manipulating the value of a currency with the aim of creating panic, and then they can buy the asset at a cheaper price. For example, a large sell order will be placed and cause the price to drop suddenly from 10% to 20% and, importantly, succeed in attracting people’s attention. The funds from the account are then used to execute a number of Limit Orders (limit orders) that are visible in the Order Book, showing the Trading Ceiling to other traders. As a result, traders see that the asset drops by 20% in value.
To reverse the situation, the manipulator will first have to make a sell wall to continue the trend. Out of panic, other traders sold out. In other words, this Domino effect is created by panicking users who keep selling at low prices, while the manipulator places virtual orders that are never filled because when the price reaches the point the orders will be filled, those orders are cancelled. When the attacker sees that the price has reached the desired number, he places a large buy order, removes the Sell Walls to reverse the trend, and buys at the desired price.
Who caused them?
The question is: can a single user create Flash Crash? It seems likely that “Whale” investors will be able to, as they have enough money to make a big enough impact. First of all, the effect on the market depends on all the participants. One user can trigger the effect, but the end result will depend on how the rest of the market reacts.
Flash Crash usually happens, as mentioned above, due to lack of liquidity, then the plan is easier to execute. However, in order to really create a massive drop and a near-instant recovery, Flash Crash needs to happen with cryptocurrencies that are harder to manipulate. Typically the top 20 cryptocurrencies, where a sudden drop will attract the attention of a large audience. In the case of the most vulnerable coins with lower market caps, if they cause a sharp drop, it is likely that no one will react and no one will want to buy them.
As such, the coin needs to be known by many people and be at the top of the rankings. Having a low circulating supply also increases the possibility of manipulation, as this further increases liquidity and reduces volume.
It is worth noting that, in some cases, exchanges have been blamed for causing the Flash Crash, whether unintentionally or by other means.
Monero – Good example
Cryptocurrency Monero — December 21, 2017 — From opening candle at $420.27 to closing at $151.26 low.
Monero, a project as old as Bitcoin, has experienced a Flash Crash in the past. The account that caused the Flash Crash, with only about 16.5 million coins in circulation, has broad approval by miners and generated $59 million in 24 hour trading volume. Over the past few years, many small Flash Crash can be seen in the chart. The most significant event occurred in December 2017, when XMR dropped from around $400 to $150, so XMR — the Monero coin — can be seen as an easy target for Flash Crash events.
How to fight Flash Crash
In the asset market at large, following the Dow Jones Flash Crash, the person responsible for this was arrested and prosecuted for evidence of market manipulation. Then teams dedicated to looking at suspicious price movements were put into action. However, institutions like the SEC do not control the cryptocurrency ecosystem, unless they see that the cryptocurrency fits the definition of a security. For now, exchanges should continue to focus on security and make simple rules to avoid Flash Crash and prevent price inflation to stabilize the market, and will help attract more customers. more users to the platform.
Follow the Twitter page | Subscribe to Telegram channel | Follow the Facebook page