Only days after an unforgiving “flash crash” wiped out hundreds of billions in value and left traders in shock, the cryptocurrency market has surprisingly proven to be resilient. An influx of bargain hunters sent nominal dollar value of total crypto market cap to back above $4 trillion with nearly $190 billion coming back into the crypto universe overnight. While the rapid recovery may mask the substantial and systemic weaknesses that the “flash crash” revealed, many are already wondering whether this is a storyline of genuine recovery or simply the calm before the next “storm.”
The Spark That Ignited the Firestorm
The large-scale breakdown started on the 10th of October, 2020, with an abrupt and severe increase in U.S.- China trade tensions. Massive new measures, such as 100% tariffs on nearly all key Chinese tech exports and tightened control over software, were enough to instantly instill real fear across global financial markets. The crypto markets were hyper-leveraged and hyper-volatile already from macroeconomic changes, and the result was a violent response. The policy shock created the conditions for massive liquidation events, panic, and wave after wave of liquidations combined with fear that spun out of control.
A Liquidation Cascade of Unprecedented Scale
What transpired was the single largest deleveraging event in crypto history in one day. In the turmoil, almost $19 billion in leveraged positions were liquidated when traders who bet on prices rising were eliminated. Altcoins were hit the hardest, with many suffering double digit declines in hours. Though Bitcoin also took a big hit, breaking below the important $105,000 threshold, its reality of being more stable than smaller tokens supported its role as the primary safe-haven asset in the market. By the end of the bloodbath, the total market cap had fallen to a low of $3.83 trillion.
Bargain Hunters to the Rescue
As the dust began to settle over the weekend, a new narrative emerged. With the market drained in terms of overselling, opportunistic traders and institutional investors saw a golden opportunity for bargain buying. With the sentiment that the worst of the fallout from geopolitics was behind us and the forcing out of over-leveraged positions, there was a clear and evident opportunity for a recovery. This buy-the-dip mentality, led by short-covering and some reinvigorated institutional flow, ultimately provided the necessary momentum for true recovery, thus reversing the very damaging declines.
Bitcoin and Ethereum Lead the Relief Rally
At the forefront of the comeback from near collapse was Bitcoin, which bounced back from a low near $105,000 to retake $115,000. Ethereum, the second-largest cryptocurrency, had a more significant rebound, moving from just below $3,500 to above $4,100. All in all, this relief rally fed into the wider altcoin market, although many of the smaller tokens remain well below their pre-crash price levels — all signs point to investor capital flowing back to the more blue-chip level assets for now.
An Uneasy Calm Settles Over the Market
While the rebound has been impressive, there remain lingering concerns. The speed and violence of the crash were a stark reminder of how easily the crypto market can be impacted by outside shocks. While there is some restoration of investor confidence, it is still brittle. This week, market analysts warned of the potential of persistent volatility over the next few days and weeks. The next move in the market will probably not come from the market itself but will be dictated by headlines from the ongoing trade war between Washington and Beijing, creating an uneasy feeling for the broader crypto ecosystem.
