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bitcoin flash crash
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Bitcoin Flash Crash Explained, And How To Prepare For The Unpredictable

Tony Spilotro by Tony Spilotro
2 years ago
in Bitcoin
Reading Time: 3 mins read
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Overnight on Saturday, in the late hours of the night, Bitcoin price flash crashed by over 10% and $1,400 in just ten minutes.

But what caused such a massive crash in the cryptocurrency, and how can investors and traders prepare for such an unpredictable event?

3/10 The moment BTC hit $12,000 was right afer midnight on a Saturday night in New York and around 6:30 AM Sunday in Europe. That means that most of Europe and N-America was not trading, only the Asian traders were in the market. Therefore liquidity was relatively low.

— Marc van der Chijs – new account (@marcvanderchijs) August 2, 2020

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What Caused This Weekend’s Midnight Flash Crash In Bitcoin Price?

Right after the clock struck midnight in New York City, Bitcoin spiked to a high of $12,098. At that moment, a cascading collapse in price began.

The initial selloff pushed the cryptocurrency below $12,000 where it paused momentarily, then the floor fell completely out from below.

Ten minutes later, BTCUSD had lost over 11% value and dropped another $1,400 to $10,600. In less than an hour total, the asset had fallen by over 12.5% and $1,500.

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But what exactly happened that caused this?

Related Reading | Dramatic $17,000 Bitcoin Peak Possible Within Weeks Based on Halving Fractal

The move was likely caused by a large, strategic actor who sought to take advantage of the lowest liquidity moment of the market. At that time of the night, entrepreneur Marc van der Chijs says North American and European traders would have been sleeping.

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In addition, the large whale taking profit during such a low liquidity timeframe, caused a cascading effect of overleveraged derivatives traders forced to cover their positions or through stops being triggered.

The same happened during Black Thursday, albeit far more severe and was driven by different circumstances and not just one whale’s profit-taking.

It also happened in reverse in 2019, as Bitcoin broke up from $4,000 to kick off a rally to $14,000. A single, strategic actor placed several buy orders across exchanges at low liquidity moments overnight on the weekend, to have a more pronounced impact.

BTCUSD Saturday Night Flash Crash | Source: TradingView

How To Prepare For The Unpredictable in The Crypto Market

Flash crashes are rare but do still happen in the crypto market. Black Thursday was especially notable. Assets everywhere experienced a liquidity crisis, but none as bad Chainlink’s flash crash to nearly zero.

In those situation’s it is almost impossible to prepare aside from having reasonable stop losses set and to never take positions with sizes too large where losses become too risky.

It situation’s like Saturday’s crash, van der Chijs says “do not sell” or panic – this is somewhat normal behavior for Bitcoin on the weekend during a “bull market.”

Related Reading | The Most Common Bitcoin Scams And How To Avoid Them

He advises investors to “HODL” on for the ride, or perhaps try your hand at trading the wild price swings for profit. He claims its “a chance to make quick money,” but admits it isn’t a game he plays himself.

Whatever you do decide to do, there’s no way to completely prevent loss in the event of a flash crash, but a properly placed stop-loss can keep risk to a minimum. Whether you are a trader or simply an investor, the stop loss is a tool everyone should become familiar with and utilize as a precaution against flash crashes.

Tags: bitcoinbtcbtcusdBTCUSDTcryptodollarusdxbtxbtusd
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Tony Spilotro

Tony Spilotro

I'm Tony Spilotro. Behind the pseudonym, I'm a global remote work leader with a decade of award-winning content experience and excellence. Here, I explore my newfound passions pertaining to privacy, finance, economics, politics, cryptography, property rights, and other libertarian-esque views. I am a Bitcoin evangelist, maximalist, and educator whenever I can be, helping to spread its message of freedom from government control, monetary policy mismanagement, and passing the buck - literally – to future generations. My journey from a curious retail crypto investor to a serious Bitcoin advocate, trader, and technical analyst is an unusual one, but life-changing nonetheless and has become less about money and more about a long-overdue revolution. While a firm believer in the laws governing math and science, I am profoundly fascinated by the impact of astrology and astronomy including moon and solar cycles and planetary alignment and their ability to influence and potentially predict markets. It hasn't yet clicked for me as to how to put anything to use, but I consider it my current rabbit hole I can't yet dig out of. My perspective of growing up alongside the internet, the dot com era, the Great Recession, and roots in video games collecting coins and rare items caused Bitcoin to immediately make sense to me. Through all of these lenses, I seek to produce content that is educational and entertaining, and I thank you sincerely for taking the time to read what I have to say. Please follow me on Twitter at @tonyspilotroBTC and feel free to drop me a line if you would like to work together.

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