Bitcoin flash crash: Why did it happen and should you worry?

It does seem surprising when everything is in green for a long time, and suddenly we see everything crashing. Even yesterday (7th September), the same thing happened. The market was seeing a free fall as if there was no resistance. From $3,900, Ethereum reached $3,000, and on the other hand, Bitcoin nearly reached $43,500k in the flash crash. Even altcoins saw devastating losses yesterday. Yes, they did recover a bit, but still, the losses were huge, and it begs the question, why does it happen? Let’s take a look.

How does a market work?

Candlestick Chart
Just a chart showing how a market moves

In any market, be it crypto, stocks, commodities or anything else, money moves from hand to hand. This means for everyone to make profits we will need new investors in the market all the time. But it doesn’t happen, and in general, some people lose money while others make profits. This is also the reason that markets don’t keep pumping parabolically. We see minor corrections from time to time which keeps the market stable. More often than not, if markets don’t correct themselves from time to time, we see a rather significant fall. So, people take profits at specific prices while new people also enter. And all in all, things keep sailing.

What happened to the crypto markets yesterday?

Complete market manipulation! Yes, you heard that right. No one can prove it, but the data and the theories make it understandable. So, as I said, not everyone in a market could profit, and the same goes for the crypto sector. When prices keep going up, many investors open up highly leveraged longs, which give them immense profits. To flush these people out, whales dump the market, and as prices start to fall, we see a domino effect.

To explain that better, let’s first understand what leveraged trading is. Let’s say you have 2 Bitcoins, but instead of holding does for 5 years, you want to double your value now; at that time, you take leverage from the exchange. You tell them, here are 2 BTC for which you can get (2-100x) leverage. Assuming you settled for a 10x, now you have 20 Bitcoins which will be your position (long in this case). Now, as prices go up for every 1% increase, you make 10% gains on your original capital. So, basically, if the markets pump 10%, you double your money.

Bitcoin flash crash
If you see yesterday’s chart where the Bitcoin flash crash happened, the candles kept becoming bigger till the effect subsided (domino effect).

The problem here is if the markets fall and you have only 2 BTC to make up for the losses. So, if BTC dumps by 10%, your capital is gone (as your position was of 20BTC), and the exchange sells your position, which creates huge selling pressure on the market. So, as the price starts to fall and people get liquidated, it becomes a domino effect where liquidation plunges the price even more, and more people get liquidated.

Data shows that over $1.1 billion long positions were liquidated yesterday in a matter of hours, proving the point.

El Salvador

Yesterday, El Salvador finally adopted Bitcoin to become a legal currency in the country. And the same day, the prices collapse, and everyone is screaming market manipulation. Doesn’t it seem too convenient? Yes, it does, and it rather solidifies my theory that huge manipulation was going on. It was as if some people/government wanted to shame El Salvador that they adopted BTC as a legal tender. Even the world bank reiterated they couldn’t extend any help to the country to make Bitcoin adoption smoother.

But El Salvador managed the situation like a boss and bought the dip. They added 150 more Bitcoins to the country’s portfolio. We definitely have come a long way when whole countries are buying dips. Only time will tell if El Salvador made the right decision; I would say they did.

Should you worry about the Bitcoin flash crash?

If you are a trader, then yes, you should be worried. The market will do a lot to flush you out, and you need to deal smartly with that. First of all, it is always recommend never to take leverage more than 5x if you are trying to stay long in the market. If there is news, then higher leverage sounds good but otherwise, no. Also, to ensure that you protect your capital even if the prices fall, start with a trailing stop loss. This will protect your capital, and as the price keeps moving, so does the stop loss, which will help you book profits in case of a crash.

But if you are an investor who buys and hold their tokens for the long term, then look at red candles as opportunities to buy the dip. And still, if the daily chart worries you, then look at the weekly, monthly or even yearly chart. You will be at peace. Crypto is volatile, which is why it has been able to outperform every index in the last ten years. If you can’t digest the market volatility, it is not for you; instead, invest in something else.

What are your thoughts on the Bitcoin flash crash? And do you think all this was planned to be on the day Bitcoin becomes a legal tender in El Salvador? Let us know in the comments below. Also, if you found our content informative, do like and share it with your friends.

Also Read: increased by 60% while crypto markets see a flash crash